Tax & admin 17 November 2017

Why rolling out IR35 into the private sector could be catastrophic for the economy

London, England - February 14, 2015: A simple wall sign outside the British Treasury building at 1 Horse Guards Road, just off Whitehall, London. Her Majesty’s Treasury is the ministry responsible for the economy and national finance. The history of the Treasury dates back to the Norman Conquest and the department has always been based in the Whitehall area.
The Treasury has suggested IR35 legislation could be extended to include private sector contractors

The air is thick with rumour and speculation. The Treasury has strongly hinted that IR35 rules governing how freelancers and contractors are taxed could soon be extended and rolled out to the private sector. It’s more than unsettling, writes Julia Kermode, chief executive of The Freelancer & Contractor Services Association (FCSA).

As we head towards the Autumn Budget on 22 November, the financial secretary to the Treasury told the Financial Times: “It is not just the issue of tax that we might not be collecting what we should be collecting, it is also an issue of fairness between the public and private sector.”

Since 6 April 2017, when the new IR35 rules came into effect in the public sector, employers in the public sector are now required to deduct tax and national insurance contributions from contractors’ pay at source as though they are employees.

Find out more about what IR35 means:

It has had a devastating impact on our public services, but still the government seems to be standing firm that extending IR35 into the private sector would remove any disparity between the two sectors and level the playing field. It has been the cause of much heated debate which has fallen on HMRC’s deaf ears and the political temperature is hotting up as we anticipate what chancellor Philip Hammond might announce in his Budget.

In the last few years we have seen many changes to tax legislation and I would argue that IR35 reform is one change that has not been properly targeted, not been proportional and not been fair on the vast majority of genuine self-employed workers or the businesses that have engaged them. None of this would have been necessary if HMRC had properly enforced IR35 in the first place.

Broadly speaking, the IR35 reform in the public sector has resulted in a less flexible and less agile workforce that is more expensive and more complex to administer and I am deeply concerned about the potential impact of rolling out the change to the private sector, particularly on the UK’s position in the global marketplace.

Simply put, if the government makes it too difficult or too expensive for businesses to access the workforce and talent they need within the UK, then why should they do business here?

Right now, the timing is wrong and will put our economy at further unnecessary risk. If the government is committed to extending IR35 changes into the private sector at the very least I would hope to see a proper post-implementation review of this year’s IR35 changes before any decisions are made.

Should the government choose to plough on and roll out the reforms into the private sector I anticipate the four following impacts:

  1. The extension of IR35 could undermine Britain’s flexible labour market

Matthew Taylor, author of the Taylor Review into modern employment practices, has stated that the UK’s “flourishing” flexible labour market is one of the country’s biggest strengths, and the “envy” of the world.

If the IR35 reforms are extended to cover the private sector, this workforce flexibility will be irreparably damaged and, together with the cost to businesses, will damage competitiveness.

There are approximately 5.5 million private sector businesses in the UK, many of whom potentially engage personal service companies, typically in high-skilled, high value activity for a short period of time.

  1. The extension of IR35 reforms could reduce tax receipts by significantly delaying major projects and the tax-generating output they produce

Project delay has been one of the well-documented impacts of IR35 on the public sector. Transport for London recently revealed a ‘significant number’ of contractors stopped working on projects as a result of IR35 changes – a move which has led to skills shortages and the significant delay to critical repairs.

We are also aware of important IT projects within the health sector going on hold due to skills shortages. These are just two examples out of many.

  1. The extension of IR35 reforms will significantly increase employment costs

This is suggested by the experience of public sector bodies, which have been forced to pay increased rates for contractors. Respondents to a recent APSCo survey pin-pointed scarcity of resource as the primary cause of this increase in costs.

Such costs have increased at an unsustainable level, with 53 per cent of those reporting a rise highlighting increases in rates of more than 15 per cent.

  1. The extension of IR35 reforms will significantly increase red tape and administrative burden for businesses

Given that each and every contractor’s specific working practices will need to be individually assessed, the impact of extending off-payroll to the private sector will significantly increase their administrative and red-tape burden.

According to the Office of National Statistics, the non-wage employment costs of having staff increased by 3.9 per cent year on year in the three months to July 2017. The ONS also said that since 2000 non-wage costs of employment have almost doubled, rising by 99.1 per cent.

Similarly, a report from the British Chambers of Commerce and Middlesex University found 80 per cent of businesses have seen their costs increase this year due to changes to the national living wage, pensions auto-enrolment and the apprenticeship levy. With further increases to costs likely, 38 per cent said they would raise prices, 25 per cent would reduce pay growth, 21 per cent will reduce staff benefits, and 20 per cent said they would scale back recruitment.

At a time when the UK needs to be competitive in a global marketplace, it would be wrong to unnecessarily target businesses who are the backbone of the economy.

Given that there are over 5.5m private businesses in the UK compared to 50,000 public sector bodies it will require a large scaling up of current policy implementation and I would suggest that HMRC lacks the capacity and capability to enforce IR35 in the private sector. HMRC is already over-stretched and the public sector changes were not implemented effectively or smoothly as a result.

I would urge Mr Hammond and the Treasury to think very carefully about any move to extend IR35 changes into the private sector. Work patterns are changing and we are seeing a growth in non-traditional employment that is going to continue. This is a structural change to the UK workforce that requires a structural change to regulations, and a holistic approach to any reforms.

Instead, we are seeing knee-jerk changes driven by tax collection for the Treasury’s coffers which have the potential to starve the growth of the UK economy and strangle the flexibility of the labour market.

Our economy needs stability right now and any move for a private sector roll out of IR35 will serve to unsettle the UK economy, UK plc and the many hard-working genuine self-employed freelancers and contractors who are supporting UK businesses and helping them to thrive.

Julia Kermode is chief executive of The Freelancer & Contractor Services Association (FCSA), the UK’s largest independent trade body that is committed to setting standards for umbrella employers and contractor accountancy providers

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