Following the Chancellor’s announcement in the March 2016 Budget about off-payroll working in the public sector, HMRC has published a consultation document detailing the Government’s plans. Here, Andrew Chamberlain, IPSE Deputy Director of Policy, explains what the document means and why independent professionals should take a stand against it.
The IR35 consultation document – what is it and who is affected?
HMRC has announced radical and damaging proposals to the way IR35 and tax liability works for contractors in the public sector. The consultation document seeks views on these changes, and IPSE will be working hard to provide as much feedback as possible. If after reading this article you feel these changes will have an impact on you, then please get in touch using the information at the end.
In essence the Government wants public sector organisations or the agency to determine the IR35 status of engagements and then, if caught, apply taxes as they would for their employees, through the Real-Time Information (RTI) system.
While IPSE fully agrees that all tax payers should pay the right amount, we believe the Government is going about it in completely the wrong way. These changes will create confusion and disruption and will have a significant impact on important public sector infrastructure projects, as contractors who are vital to their completion will no longer be willing to work on them. Alternatively, contractors impacted by this measure will seek to raise their day rates to compensate for the loss, which will cost the Government more.
Will it ever affect me?
As it stands, the changes are earmarked for the public sector only. The definition the Government intends to use for “public sector” is that which is set out in the Freedom of Information Act 2000. This covers organisations such as: government departments; executive agencies and non-departmental public bodies; the NHS; police and fire authorities; local authorities; devolved administrations; educational establishments including universities; the BBC and Channel 4; and the Bank of England.
However, while the consultation document makes it clear the rules in the private sector will remain unchanged, any stakeholder with an even cursory knowledge of this issue will anticipate the Government seeking to apply these changes to the private sector later down the line.
What about employment rights?
One of the major criticisms levelled at these proposals is that the line between employment rights and tax status will be blurred. The Government wants to tax independent professionals as if they were employees while not extending them any employment rights. Not only is this naïve on the Government’s part, but it is grossly unfair. After all, it is hardly unreasonable for workers to expect employment rights if they are to be taxed like employees.
Denying them these rights is likely to give rise to legal challenges.
The online tool and its repercussions
HMRC plans to develop a new online tool that will enable the client or agency to determine the status of each engagement. The client / ‘engager’ will enter information about the nature of the assignment and the tool will then generate an ‘in or out’ result. If it is deemed to be within the scope of IR35, then employment taxes will be automatically deducted through the RTI system. If ‘outside’ IR35, the contractor can be paid gross and account for tax as they do now.
There are serious concerns at IPSE about how accurate this tool will be and whether it will produce fair results. As an organisation committed to effecting change on an unfair IR35, we know just how complex it is. There are huge doubts over whether a generic tool will get things right every time.
When does the Government want these rules to come into practice?
The Government intends to bring in these rules from April 2017. It is evident that such a short deadline poses a technical problem for engagers as they often have entirely different computer systems for paying employees (through RTI) and for paying invoices.
To apply these rules both systems will need to be joined up —a problem acknowledged by the Government in the consultation document. The question is, how will this work in practice and will systems have time to adapt?
What can be done?
The impact assessment included in the consultation document is neither robust, nor credible. It asserts, amongst other things, that the cost of implementing changes will not exceed £500,000.
IPSE foresees costs being significantly higher than those predicted. The impact assessment does not take into consideration the cost of dealing with appeals. There is also no factoring in of the cost of losing contractors working in the public sector or the forced engagement of much larger corporate companies to replace this labour force.
IPSE will make the case against this proposal and we are already working on our response. We’ll be conducting a survey; attending and hosting roundtables with stakeholders; holding face-to-face meetings with HMRC; commissioning independent research to challenge the impact assessment; and submitting a written response.
But we need your input too. And this is how you can provide it:
- Respond to the consultation
You can respond directly to the consultation by emailing email@example.com or writing to HM Revenue and Customs, Employment Status Team, Room 1E/10, 100 Parliament Street, London, SW1A 2BQ . Tell them in your own words how this measure will impact your business and the public sector projects you’re working on.
- Let IPSE know of your response so that it can inform our work
Please email us with any comments or responses that you have made, so that IPSE can begin to put together a full case on the subject, and use this information to inform meetings we will have with key business leaders and organisations. Get in touch by emailing firstname.lastname@example.org
We will keep you updated on the developments of our campaign. This issue requires strong and decisive action, and IPSE will be the voice of the self-employed in our response to this proposition.
Please keep checking our website for more developments on this critically important issue.
IR35 Case Studies
Steve Strain, Principle Consultant at SLS Transition
I have enjoyed working with public sector clients for over 7 years, but I fear these proposals will now force myself and many others to look to the private sector for all future clients. The alternative, should an agency blindly choose to take the risk averse route predicted and declare me as operating “inside” IR35 – without any knowledge or analysis of my working relationship with my client –, is I would need to raise my rate to cover the burden this legislation would bring. When you think of the thousands of skilled experts supporting Her Majesties
Government to deliver critical programmes within tightening budgets, the impact would either be they lose the ability to deliver completely, or the cost of that delivery will go up by 20-30%. The cost to the UK taxpayer will be millions.
Before abandoning the public sector completely I imagine that I will first try to insist on even more explicit B2B working relationships with the client when first engaging via the agency. If they can guarantee me that we will operate as “outside” IR35, and then see this through with an educated client aware of the risks of not doing so, then I would consider the contracts. But sadly most agencies and clients do not have the knowledge of IR35 case law to set up working arrangements which are safely seen as “outside”. This is why, to date, contractors have held that responsibility, and have educated ourselves to ensure compliance to the legislation. Taking that responsibility out of the hands of those small businesses which largely understand what they need to do, and pass that onto a group who have very little understanding, is only a recipe for disaster.
Jonathan Bentley, Redwood Technology
With over twenty years’ experience in my field, and much of that time spent in local or central Government, this has created a decision point for my Company. There will be no further engagements with Government bodies as the rules have the potential to expose the Company unnecessarily, this is a risk we have decided to avoid without exception.
It will be of very deep concern if this tactic of shifting responsibility out of Ltd Companies as to how they operate to intermediaries or the hiring Principle shifts in the private sector also, it will force a move out of the UK in all likelihood and therefore out of the UK tax system altogether.
Considering the tens of thousands paid in Corporation tax, dividend, tax, personal tax amongst others, my effective exit will cost the exchequer a considerable amount of money in tax alone. Add to that the loss of consumer spending, it is something I would urge HMRC to take a wider view as I will not take regular employment.