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Industry responds to IR35 extension legislation

Following the publication of the draft legislation around extending the IR35 public sector rules to the private sector, the industry has responded.

The draft legislation confirmed that IR35 will be extended to the private sector on 6th April 2020. The government says this measure is expected to impact 170,000 individuals working through their own company, who would be employed if engaged directly. This measure will apply to engagements with medium or large-sized organisations in the private and third sectors. The government says engagements with small organisations outside the public sector are exempt.

The government also says this measure affects approximately 20,000 agencies who provide workers to medium and large-sized organisations. They will need to operate payroll for any workers they supply who work through their own company and fall within the scope of the rules.

Tom Hadley, REC director of policy and campaigns, said, “The government has not taken on our strong recommendation to put its IR35 plans on hold, to conduct a comprehensive impact assessment, and to remove the exemption for small businesses. The draft legislation risks damaging the UK’s productivity and labour market flexibility at a time when it is most needed.

“We know from experience that the IR35 rules are a huge problem for employers and contractors alike. Making sure everyone pays the right tax is essential, but the rules need to be clear to be effective. The last thing private sector businesses need at this time of Brexit uncertainty is rushed or poorly-designed tax rules that add further uncertainty to an already fragile business landscape.

“The government must urgently reconsider its choices and delay changes to IR35 until at least April 2021.”

Samantha Hurley, operations director at (APSCo), commented, “While the draft legislation is largely in line with our expectations, we at APSCo are extremely disappointed that fee-payers will shoulder the liability of incorrect status determinations – particularly as this is at odds with what was anticipated. It is frustrating that recruiters will, in most cases, continue to bear the brunt of liability in the supply chain whether as the fee payer or the first tier supplier.

“We also believe there should be more clarity around the meaning of a status determination statement. At present, the client ‘complies’ if it provides the decision with reasons to the party contracting with it in the chain and the worker – regardless of whether HMRC ultimately decides the decision was correct – but how much detail should go into this reasoning? Similarly, the legislation states that ‘reasonable care’ should be taken, but there is not yet any certainly around what ‘reasonable’ should look like. In our view, there is still too much room for manoeuvre.

“We welcome the fact that the criteria which defines entities which are ‘small’ – and so exempt from the changes – has now been more clearly defined. However, there is no statutory obligation on the client to notify the parties in the chain that they are small and commercially this will be problematic.”

Dominic Harvey, director at CWJobs, stated, “This could be potentially damaging to a tech industry that’s already finding it difficult enough to plug the skills gap as it is. Contractors provide useful and flexible solutions to businesses up and down the country. Forcing companies to be liable for deciding on the tax status of its contractors could see them abandon this help altogether, leaving an even bigger skills gap to fill. Until a shrinking permanent tech workforce can provide the skills, projects could be delayed or scrapped and will this surely damage our competitiveness on the international stage. We would urge the government to delay the introduction of this legislation, until the potential effects have been calculated and the industry has a chance to reduce the skills gap its facing.”

Adrian Marlowe, chair of the Association of Recruitment Consultancies (ARC), shared, “Now that draft legislation has been published, HMRC’s position on extending the public sector rules to the private sector is clear. The application date of 6th April 2020 is no surprise despite the rumours that HMRC may delay the launch,  but nevertheless contractors, agencies supplying them and hirers alike will no doubt be disappointed that few adjustments have been made to the principles and that it is proceeding much as originally forecast.

“ARC will continue to review the draft legislation, against the background that we have long pressed for modernisation of certain key elements to IR35 principles. The assessment of hypothetical employment status and related definitions has caused much confusion over the years and there is a plethora of evidence that the assessment is problematic. After two years of use the CEST tool, which is intended by HMRC to make the assessment easier, is still flawed and misleading.

“We believe the government is missing a trick in not tidying up the entire IR35 legislation at this stage. Instead, with the inclusion of an obligation upon a hirer to give reasons for the outcome of its IR35 assessment, and liability for the tax and NICs if reasons are not given, the rules are now more complicated than ever. We fear the resulting administrative burden and associated risk will inevitably induce blanket decisions. HMRC argues that it seeks to avoid blanket IR35 decisions, be that as it may. The decisions that are most likely to be made are not IR35 decisions, they are the decisions not to use any affected company contractor, perhaps save in very obvious ‘outside’ circumstances, so avoiding application of the rules in the first place. This of course could be HMRC’s intention and, if so, it will probably achieve the objective of addressing tax avoidance on a grand scale, but at what cost?

“At the same time the likely fallout may well offer a golden egg to the alternative model, the umbrella sector not affected by this legislation. Accordingly employment businesses currently supplying contractors may want to consider their position and policies. What services can umbrellas offer that agencies cannot, given that unlike employment businesses that provide work finding services which are regulated and may not charge their agency workers, umbrella businesses do not provide work finding services and do charge their employed contractors?

“If independent company contracting is to be protected, with those willing to take the risks associated with running a business being recognised as deserving better tax breaks, it is imperative that there is an independent review of this legislation before it is implemented. There has not yet been any review by the Treasury Select Committee despite one having been planned based on evidence from ARC when the public sector rules were imposed. Perhaps now is the time for such a  review to take place?”

Mark Beal-Preston, chief commercial officer at First Freelance, commented, "We're disappointed to see that many of the key concerns raised by the contractor community have been overlooked with this draft legislation. It now appears unlikely that there will be a shift in the policy or plans to implement these reforms in April 2020, and the big question for the industry is will businesses be ready in time to implement these changes without unintended consequences?

"If not, there is a strong likelihood that incorrect decisions will drive up costs and reduce the valuable skills needed on a contingent basis by clients throughout the UK.

"Across the industry, there is still a distinct lack of understanding about the new rules - from contractors to recruitment agencies and end clients. There are still question marks hanging over the reliability of government's CEST tool and if it can really make the necessary changes to needed provide accurate assessments in line with case law, as well as delivering planned education on how to prepare businesses in time.

"Across our business, we’ve been working hard to help our agency partners and contractors and their end clients understand what these changes mean in practical terms and to provide them with all the support they need to navigate these changes successfully.

"Whilst we welcome and support any efforts to drive compliance, safeguarding the interests of true contractors and freelancers is absolutely vital to the UK economy. There is a very real risk that access to skills will be severely limited if people choose to turn their backs on contractors because of these changes.”

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