IR35 comes to the private sector

This week marks the introduction of IR35 legislation to the private sector. It has been a long journey. IR35 legislation was first introduced in 2000 with the aim of curbing disguised employment ie when people are essentially acting as an employee, but being treated, for tax purposes, as a contractor. In 2017 new legislation meant that the onus of evaluating IR35 tax status moved from the contractor to the hiring body or agency.

This has been the subject of a lot of controversy, mainly because of the way it was introduced. Contracting expert Dave Chaplin says that, when it was first introduced to the public sector, it led to many jumping ship to the private sector or increasing their rates to account for higher taxes and several public sector projects were reported to have suffered delays. A big concern has been that employers have made blanket decisions on tax status without considering each case individually because the legislation is too complex.

IPSE, the Association of Independent Professionals and the Self-Employed, has been doing polls about the extension of the legislation to the private sector for the last few years and says the changes are undermining the sector at the “worst possible time” due to the impact of the pandemic on the self employed and on employers seeking to rebuild after Covid.

IPSE research has shown that half of freelancers are planning to stop contracting in the UK after the changes – unless they can get contracts unaffected by them. Instead, they are planning to seek contracts abroad (24%), stop working altogether (12%), seek an employed role (17%) or retire within the next year (11%). Additionally, nearly one in four contractors said in February that their clients were either uncertain or had made no indication of what they would do in response to the IR35 changes. A quarter said that their clients were planning to blanket-assess all their contractors as ‘inside IR35’ and one fifth will only engage contractors working through umbrella companies. Nearly one in 10 contractors said their clients were planning to cease engaging contractors altogether.

Complexity

An HMRC report published last month sought to play down the concerns. It was based on a ‘qualitative’ study of just 34 recruitment agencies about the anticipated impact of the reforms. Just 22 of these work with private sector clients only. Twelve agencies that work with public sector clients were interviewed about the effects of the 2017 IR35 reforms. They said there was no impact for most agencies of the private sector reforms and a variety of experiences in ‘some’ agencies when it came to the roll-out in the public sector. The report has been widely criticised by contracting experts for they focus on just 34 agencies and for findings which fly in the face of other reports and surveys.

The Government has given employers a year’s reprieve from fines if they make a genuine mistake due to the new legislation, but IPSE says this does little to acknowledge the sheer complexity of the system, which has led to HMRC losing the majority of tribunals linked to it. it adds that HMRC’s tool which is meant to reduce complexity is not comprehensive enough to be effective.

The need for reform

IPSE says its research shows many employers are either bringing all contracts inside IR35 even when they don’t need to, are only engaging contractors through umbrella companies or imposing a blanket ban on contractors.

It adds that what is needed is root and branch reform of the tax system for self employed workers. In the old days, lower taxes were traded off for no holidays, sickness compensation or other employment rights. IR35 means self employed workers have the worse of both worlds, potentially paying higher taxes but with no additional rights.

It’s much the same argument – though in reverse – that has been at play in the recent court case involving Uber where workers argued that they were not self-employed contractors, but workers, entitled to workers’ rights. The Matthew Taylor report on modern working practices addressed the issue of employment status among many others. It has yet to be implemented, but every day the case for addressing these issues grows.

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