Private sector warned of ‘brain drain’ risk by putting off prep for April 2020 start of IR35 reforms

Private sector firms need to take their time to understand the complexities of the incoming IR35 tax avoidance reforms or risk losing their contractor talent, a report by Brookson Legal has warned.

The IR35-focused legal firm polled 516 UK contractors to gauge their concerns about the April 2020 extension of the IR35 reforms to the private sector, and what action they are willing to take if their engagements are adversely affected by the new rules.

Under the reforms, from April 2020, medium to large private-sector organisations will take responsibility for determining whether the contractors they engage with should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35). At the moment, it is down to contractors to self-declare how they think they should be taxed.

According to the Brookson Legal poll, 59% of respondents said they would seek out new job opportunities if an engagement with their current organisation is deemed to be inside IR35, and a further 21% said they would challenge such a determination. Some 37% said they would never consider working inside IR35.  

A similar shift in responsibility took place in the public sector in April 2017, and in the lead-up to and aftermath of the changes, there were numerous reports of contractors walking out across government departments, and claims that many had had their engagements incorrectly classified.

According to a Computer Weekly investigation conducted several months after the roll-out of the public sector IR35 reforms, some government departments were known to have lost up to 40% of their IT contractors after the new rules came into play.

“A lack of preparation on the part of public sector hirers led to wide-scale ramifications, including a loss of skilled contractors to the private sector, project delays and escalating costs,” said the Brookson Legal report.

And it is feared that the same could happen again once the reforms apply to the private sector, unless firms take the time now to get to grips with the rules and their new responsibilities.

 “Undertaking the IR35 employment status tests takes time and resource and even HM Revenue & Customs [HMRC] has struggled to understand and apply the rules,” said Joe Tully, managing director of Brookson Legal.

“Businesses cannot avoid the issue, though. Those that panic and make a knee-jerk reaction, or try to take short cuts with a blanket approach, may find that they lose out in the long run.”

According to HMRC’s IR35 guidance, organisations are supposed to assess the tax status of each contractor they engage with on an individual basis, but anecdotal evidence suggests that has not always been the case.

In fact, one month after the public sector reforms came into force, the NHS Improvement watchdog admitted to having interpreted HMRC’s guidance incorrectly, leading to blanket determinations about the tax status of staff.

“No business wants to lose its skilled contractors, but the failure of some businesses to take steps to even understand their exposure to IR35 means that they are putting themselves at risk,” said Tully. “These risks include losing their vital flexible workforce, increased costs and the danger of wrongly assessing contractors – leaving them open to employment rights claims.”

Respondents to the survey were also asked for their views about how prepared private-sector organisations seemed for the changes, just six months before they will have to abide by the reforms.

Just 3% said they thought the private sector would be ready in time, and less than a quarter (22%) said they trusted their hirers to determine correctly how they should be taxed.  

Some 80% of respondents to the Brookson Legal survey said they would be more inclined to work for companies that “proactively” adverstised roles as “outside IR35”.

Tully added: “Businesses should be making IR35 assessments an urgent priority and ensure they take reasonable care when looking at an individual’s circumstances. Not doing so could cause further complications down the line, including challenges from contractors and falling foul of HMRC.

“Coming to a fair and just conclusion about a contractor’s IR35 status, on the other hand, allows the business to move on and look at the best next steps for its flexible workforce.”