UK labour market could be harmed by private sector roll-out of IR35 reforms, consultancy warns

Extending the IR35 tax avoidance reforms to the private sector risks hampering the flexibility of the UK’s IT workforce, research from ContractorCalculator has suggested.

The tax advisory service asked 2,000 contractors, including 813 who work in IT, how they would respond should the government opt to follow up the public sector IR35 reform roll-out by making compliance mandatory in the private sector too.

As previously reported by Computer Weekly, a government consultation into extending the reforms kicked off in May 2018, with HM Treasury claiming non-compliance in the private sector costs the economy around £700m a year.  

The consultation’s findings are due to be published later this year, and if the government decides to press ahead with rolling out the changes to the private sector, it is likely businesses will have to assume responsibility for determining the tax status of the contractors they engage with.

At present, it is up to contractors to self-declare if the work they do for a private sector business means they should be taxed in the same way as salaried employees (inside IR35) or as off-payroll workers (outside IR35).

If IR35 reforms were extended to the private sector, 94% of participants in the ContractorCalculator poll said they would avoid “inside IR35” contracts, with 25% claiming they would never accept a position advertised as such.

In a similar vein, 23% said they would quit contracting altogether if the government decided private sector reform should be pursued.

Dave Chaplin, CEO and founder of ContractorCalculator, said the poll results suggested that rolling out the reforms to the private sector could lead to skills shortages later down the line.

“As our survey shows, an expansion of the new tax into the private sector alone threatens to deprive the UK labour market of much of its flexibility, and it will cost them, both in monetary terms as well as in talent and skills terms, with 94% of contractors avoiding ‘inside IR35’ work,” he said.

“Our findings paint a bleak picture of things to come if the government chooses to roll out the new off-payroll tax to the private sector. It will be devastating for UK plc and the UK economy overall.”

Some respondents said they would be willing to accept inside IR35 engagements if the organisations they worked for would be willing to raise their pay (73%) or provide them with the same employment rights as salaried employees (94%).

On the latter point, 89% said they would not be averse to taking legal action to secure the same employment rights – such as sick pay, maternity leave and disciplinary protection – as full-time, contracted employees.

“The off-payroll tax rules may not require firms to grant [such] rights to contingent workers, [but] contractors are willing to take measures to secure employment rights if deemed to be ‘employed for tax purposes’, resulting in potentially costly legal implications for hirers and again more damaging impact for UK plc,” said Chaplin.