IR35 to change contracting in the private sector
Victoria Roythorne, head of compliance and contractor care at Outsource UK
The use of flexible workers, or contractors, has rocketed over recent years. In fact, according to the Resolution Foundation, Britain’s reliance on a contingent workforce is now so great that the number of temporary staff has increased 40% in just ten years. Whilst this encompasses the whole flexible working mix, we have seen a significant rise in firms using contractors to help fill short-term needs or finalise projects. Firms see flexible workers as a quick way to hire the specialist skills that they need, without the commitment of permanent resource. However, with the expected changes to IR35 legislation in this month’s Budget, the way that businesses are able to utilise professional contractors could soon change.
This is because the use of contractors has become a grey area in recent years. Many contractors choose to provide their services by setting up their own Limited Companies, thereby operating on a business to business basis. Whilst many businesses genuinely turn to contractors for consultancy services, the government believes that up to a third of current contractors are actually being engaged and managed almost on a permanent basis – with little difference between these workers and permanent members of staff doing the same or similar roles.
The problem in this scenario is that there are tax contribution differences between someone operating via their own business, or someone being fully taxed by the PAYE system. The recent Eamonn Holmes furore is an example of just this – his freelance status meant his limited company has paid 19% corporation tax, not the 45% income tax he would have been liable for had he been a full-time employee. We do not know the ins and outs of exactly how these services were provided – he may very well be a genuine freelancer, but it’s this kind of uncertainty that has led the government to estimate that contractors wrongly assessing their tax status could end up costing the economy £1.2 billion by 2021/22.
IR35 explained – what’s changing and why should firms take notice?
IR35 is a tax legislation designed to combat tax avoidance by workers supplying their services to clients via a third party, (such as a limited company); but who in reality, are performing services in the same way as an employee.
To help clamp down on this activity, HMRC introduced changes to IR35 in the public sector in April 2017. The changes shifted the responsibility in making IR35 status assessments from the Limited Company (i.e. the worker) to the agency and the end client. Whilst many within the staffing industry have questioned the effectiveness of these changes, and certainly had to weather the storm of months of uncertainly and confusion, the government thinks that the reforms in the public sector have been successful. This has led many to believe that we are likely to see a similar announcement affecting the private sector in the Autumn Budget on 29th October – with reform possible as early as April 2019.
This means that every business using contractors needs to understand how IR35 affects them and be able to assess whether their workers fall in or out of ‘scope’ of the legislation for each assignment.
What are the consequences of getting it wrong?
As a result of changes to IR35 legislation, businesses are likely to be affected in three key areas.
- Financial penalties
The updated rules for IR35 in the public sector make it clear that if an assignment is ‘inside’ IR35, and the entity responsible for paying the worker (either the hirer or the agency involved) does not deduct National Insurance and applicable tax before paying the worker, then that body can be liable for the unpaid tax and NIC payments.
The legislation, as it stands within the public sector, requires ‘reasonable care’ to be taken when making assessments. Reasonable care could be difficult to prove if a blanket approach was taken to making status assessments, but perhaps of equal concern to businesses and the recruiters placing them is that contractors will want to work for firms that understand the rules, and have taken appropriate steps to ensure compliance. The best talent will likely be attracted to businesses who have taken measures to understand and manage the legislation reform effectively.
- Increased costs
One reaction from workers within the public sector who were assessed as ‘inside’ IR35, was to ask for an increase in their daily or hourly rate. This measure went some way to compensate for the impact of their tax and NIC contributions being deducted at source. It’s possible this knock-on effect will happen in the private sector too, if the legislation came in, so firms need to be aware that the cost of contingent labour may increase.
Whether or not the Chancellor announces the implementation of IR35 in the upcoming Budget, the introduction of this legislation is highly likely, following its enactment in the public sector. Whether they like it or not, firms need to get to grips with HMRC IR35 changes and work with recruiters to understand whether contractors fall in or out of scope. If they don’t, they risk financial and reputational damage.
Talent is what drives a business forward, and contingent workers are a key part of the mix. It’s worth noting that contractors add significant value to the economy, along with adding invaluable expertise to businesses which require specialist input to complete projects. As we move towards 29th October and businesses gear up for legislative changes which may affect them, IR35 should be a key consideration otherwise they risk being caught out.
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