IR35 - A public and private issue
James Hunt, director of interim management at Green Park, discusses the extension of IR35 into the private sector and considers what effect this could have on business
Independent contractors and a flexible labour market are vital components of the UK economy, so there was a widespread sigh of relief when Philip Hammond confirmed a delay in the introduction of IR35 changes to the private sector in his autumn Budget.
Only applying to large and medium-sized organisations - and not until April 2020 - the extra year could be crucial in the successful implementation of these ‘off-payroll’ rules, which aim to curb tax avoidance and had a messy introduction to the public sector in April 2017.
With the announcement of the delay and additional time to prepare ourselves, we ask: What can we learn from the application of IR35 in the public sector? We know many contractors were wrongly placed inside IR35. HMRC recently lost a legal case where it demanded £26,000 in retrospective taxes from a public sector IT contractor it believed was covered. If IR35 is extended across the private sector we would hope for much greater clarity from HMRC to establish who falls in or out of scope.
HMRC’s Check Employment Status Tool (CEST), used to determine if contractors are covered by IR35, has failed contactors in a multitude of ways. Many see it as biased and unjust, with major discrepancies in how it determines employment status. The government’s own report “Off-payroll reform in the public sector” found that 43 per cent of those who had difficulties complying with the legislation attributed their problems to CEST. HMRC must address these issues prior to introducing IR35 to the private sector
The same report found that 47 per cent of public sector bodies did not think they had enough time to prepare when the IR35 changes were introduced. Now, with an additional year before the private sector becomes subject to the same changes, it should be possible to minimise the damage if the existing issues are addressed prior to the roll-out. A suitable timeline needs to be drafted allocation sufficient time for contractors, employers and the Government to prepare and adjust.
As predicted, the public sector has experienced a significant reduction in the number of available contractors following the introduction of IR35, with many moving into the private sector. There is a need to recognise that the same skills drain could occur among interim talent in the private sector, with contractors discovering they have more to gain both financially and in terms of employee benefits, by taking up permanent positions instead. Additionally, with Brexit already casting uncertainty for European nationals, could the new IR35 regulation push those already on the fence to seek a more amenable tax regime outside the UK?
In the public sector it now costs an interim about 25 per cent more, pound for pound, to take an assignment inside IR35 instead of outside. In addition, the cost to hire has risen and the number of interims willing to take such assignments has gone down.
Contractors and interims possess the necessary expertise to help guide businesses through Brexit and without their specific skills set, our economy could face significant threats. The government must seriously contemplate the detrimental effect of a poor implementation strategy and decide if we can afford to repeat the issues seen in the public sector.
We would like to see the extension of IR35 into the private sector delivered through a controlled introduction, which aims to boost public confidence in the legislation and HRMC’s implementation. The government must also work alongside the industry and its contractors to ensure the scheme works for them not against them, to avoid a skills shortage. Businesses must start preparing for change, but will need guidance from HMRC before significant process changes are made.
How can organisations prepare?
Even with a phased and controlled introduction, private sector organisations must learn from the public sector and prepare in advance if they are to avoid negative impacts. This means ensuring they have the right expertise in place to assess and mitigate risks in the attraction and onboarding of interim managers. Without this, organisations may find themselves unable to fulfil their business objectives or, through disorganised processes and incorrect determinations, cause unnecessary reputational damage.