Draft finance bill dims hopes of private sector reprieve on April 2020 roll-out of IR35 reforms

All change on IR35

Under the terms of the proposals, private sector organisations will assume responsibility for determining if the contractors they engage should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).

These decisions should be based on the nature of the work they do, and mean individuals who are deemed to be working inside IR35 are liable to make the same tax contributions as full-time employees, but without being eligible for paid holiday or sick leave, for example.

“We can only hope that the incoming prime minister will recognise this [private sector IR35 tax avoidance legislation] for what it is, and scrap it altogether”

As previously reported by Computer Weekly, concerns about the impact the plans could have on private sector organisations have been repeatedly raised by contracting groups.

This is about how the changes HMRC is proposing could drastically increase the administrative burden private sector organisations find themselves under, and may even prompt some to wind down their reliance on flexible workers as a result.  

Furthermore, it is also feared the change could lead to a repeat of what occurred in the run-up to HMRC introducing the same rules to the public sector in April 2017, whereby confusion over how to implement the reforms led to IT contractors exiting projects en masse.

This was largely down to the fact that, in the rush to meet their compliance obligations, a number of public sector organisations are known to have resorted to making blanket determinations about the tax status of the IT contractors they engaged with.

The impact on IT contractors

Paul Middlebrook, a director at IT infrastructure consultancy Azation, relies on a mix of full-time staff and contractors to assist its clients on the design, implementation and management IT projects.

“Because of our size, we typically engage our clients via standard IT contracts – so we appear to be a public services company,” he said. “We pay PAYE tax for our permanent staff, plus National Insurance and corporation tax on any profits that remain – everything we do is legal already.”

However, he fears the roll-out of the reforms are liable to cause confusion among the clients it engages with because of the mix of workers it employs. This, he fears, could lead to a loss of income.

“Clients will not understand how we operate, and because of IR35 we will therefore be treated as employees – with the associated additional tax burden/loss of income. I also worry that clients will not understand the wider legislation and will reduce or stop using organisations such as ours,” he said.

The private sector reforms are specifically targeted at clamping down on tax avoidance by contractors working for medium-to-large businesses. But it is small to medium-sized enterprises (SMEs) that will bear the brunt of the reforms, said Middlebrook, because the vast majority of the contractors such organisations engage will come from small-scale consultancies.

“As a small business, we will be directly impacted by legislation that is not intended to target us – we are the bottom of the stack and will suffer from any issues that impact medium and large businesses. We have already seen the impact directly in the public sector clients,” he added.

Problematic legislation

Digging into the draft legislation itself, Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, raised a couple of red flags about its contents, which he fears could create even more problems for the contractor community later down the line.

“Under the existing Chapter 8 IR35 rules, contractors decide their IR35 status after the work is done, using the known facts to build the hypothetical contract,” he said.

“Under the new rules, the hiring firm must make an assessment of tax status for someone before they start work, and before the full facts are known. It’s like trying to judge someone before they commit a crime.”

He continued: “Worse still, if the hirer decides you are going to be within the rules [in future], they [can] then deduct tax from source, and there is no way to appeal the full tax at a later date.

“This is because the largest portion of the tax they deduct from their costs is employers’ National Insurance. Contractors cannot get this back at a tax tribunal, because they never paid it – their ‘deemed employer’ did.”

HMRC has confirmed it will be consulting on the draft legislation until 5 September 2019, and the final version of the legislation is due to drop as part of the March 2019 Budget.

While the IR35 reforms might not be to many people’s liking, Mike Butchart, CEO of contractor-focused accountancy firm, QAccounting, said the emergence of the draft legislation should be seized on by the private sector now so they can start preparing for the April 2020 go-live date.  

“With the release of the draft legislation, recruitment agencies and medium and large engagers can start putting processes in place to manage reform next year with a degree of certainty,” he said.