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Contractors are part of the UK’s flexible workforce and many are very worried about the rollout of a tax reform to the private sector after its impact in the public sector. Mike Smith from Company Debt outlines why.
In last year’s budget, Philip Hammond announced that the rollout of IR35 into the private sector would be delayed until 2020. Although the delay was welcomed by UK businesses and contractors alike, it has only brought temporary respite. Now, as April 2020 draws nearer, we ask whether contractors and businesses should be worried about the rollout of IR35 into the private sector.
Back in 2017, we reported that rumours IR35 would be extended into the private sector were the biggest concern for contractors. In fact, 48 percent of the contractors polled admitted it was their biggest worry, way ahead of competition for contracts, which troubled a comparatively small 18 percent. So, just what is it about the new tax legislation that’s striking fear into the hearts of contractors?
The results of a recent survey by ContractorUK highlight a few of the key reasons contractors are so concerned:
● 65 percent of contractors believe their income will decrease following the implementation of IR35 due to higher taxation and National Insurance liabilities.
● 80 percent of contractors believe businesses will not understand how to implement the new rules effectively, creating an additional administrative and compliance burden.
● 62 percent feel that ‘blanket IR35 inclusions’ will be used by businesses to cover their backs even where the reforms should not apply.
● 46 percent say they will wait to see what the ‘initial consequences’ for the contracting market are before deciding whether to leave the industry.
To see whether the concerns of contractors are legitimate ahead of the private sector rollout, it makes sense to look at the impact IR35 has had on the public sector following its introduction in 2017. Unfortunately, it seems there are several legitimate causes for concern:
1. Projects have been delayed
Fears that projects will be delayed as businesses struggle to apply the IR35 reforms appear to be well-founded, based on the public sector experience. The jump in project costs caused by the IR35 reforms and the potential loss of talent due to the dent in the incomes of contractors could lead to projects being put off and even shelved entirely. Following the public sector rollout, Transport for London blamed a five-month delay on a ‘significant number’ of vital contractors deserting its operations as a result of IR35 changes, and there’s no reason not to expect similar next April.
2. There’s been a loss of talent
Warnings from private sector contractors have been clear – “we won’t hang around to be punished by these rules”. It’s suggested that as many as one-in-five contractors will leave their role for a permanent position after April 2020 due to the detrimental impact it will have on their livelihoods. Research by Contractor Calculator revealed a similar pattern after IR35 was introduced in the public sector:
● 37 percent of IT contractors abandoned the public sector following the reforms;
● 63 percent of NHS contractors considered a new career entirely, while 40 percent thought about quitting contracting altogether;
● 25 percent of NHS departments lost at least 50 percent of their flexible workforce.
3. Contractor fees have increased
Faced with a growing tax bill and none of the benefits offered to employees, it’s hardly surprising that contractors will look to recoup their losses by increasing their fees. That, along with the additional employers’ National Insurance contributions, will lead to a significant increase in the costs of UK businesses at a time, post-Brexit, when the government should be doing everything it can to drive economic growth.
A Computer Weekly article has suggested that even where an increase in a contractor’s day rate has not been agreed, contractors are making their feelings felt by pulling out of engagements that require them to travel long distances.
Given that the next few years will be crucial for the UK’s economy, it perhaps seems strange that a policy that has already caused serious issues in the public sector would be rolled out into private sector and prioritised ahead of other initiatives that could drive economic growth. However, although the concerns are clear, the reforms are manageable and companies do still have plenty of time to prepare. Hopefully, that will reduce the number of blanket inclusions that were so damaging for contractors and organisations in the public sector.
*Mike Smith is a director of Company Debt, a leading debt advice and rescue service for small and medium-sized businesses.