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The government has used the Autumn Budget to quietly confirm plans for a consultation on extending the IR35 tax avoidance reforms to the private sector, despite fierce opposition to the move from stakeholders.
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While the Chancellor, Philip Hammond, made no mention of extending the IR35 reforms to the private sector during his Autumn Budget 2017 speech, the supporting documentation states a consultation into the matter is on the cards.
The Autumn Budget “Red Book” confirms the government is mulling over rolling out the IR35 reforms to the private sector, as part of an ongoing clampdown on limited company contractors working as disguised employees to avoid paying PAYE tax and National Insurance contributions.
“The government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018,” the document states.
According to the Budget documents, a revamp of the IR35 regulations in April 2017 has led to improved levels of compliance in the public sector, after contractors were relieved of responsibility for self-declaring their tax status.
As such, it is now up to the public sector bodies they engage with to decide whether or not contractors should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35).
It is assumed, therefore, extending the reforms to the private sector will result in SMEs and enterprises having to shoulder the administrative burden of making such declarations for the first time. “A possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company,” the Autumn Budget 2017 documents state.
Read more about IR35
- With the government’s stance on rolling out the IR35 reforms to the private sector appearing to soften, IPSE and others air concerns over the threat this move could pose to the post-Brexit economy.
- Stakeholders are accusing HMRC of trying to suppress their take on how the tax avoidance reforms are affecting contractors.
On the point of public sector compliance, Andy Chamberlain, deputy director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), made the point to Computer Weekly that things may not be all that they seem on that front.
“We strongly believe there is over-compliance going on because there is no liability for saying IR35 does apply, if it turns out it shouldn’t do later down the line,” he said.
“There is only liability if you say it doesn’t apply, and someone comes along and proves it should have done. Then the liability goes back to the client who made the decision, so there is an in-built incentive in these rules to apply IR35 when perhaps it shouldn’t do.”
Misgivings over reform extensions
In the run up to the Budget, IPSE and others outlined a number of other misgivings they had about extending the reforms to the private sector, on the back of the disruption and upheaval the public sector roll-out has caused.
In light of this disruption, caused by mass walkouts of IT contractors at the Home Office, HMRC and other government departments, contracting stakeholders have repeatedly urged the government to think twice about extending the reforms without a large-scale public consultation taking place first.
In a statement, Julia Kermode, CEO of the Freelancer and Contractor Service Association (FCSA), welcomed the government’s decision to consult on the changes, as concerns were previously raised it may press ahead with extending the reforms without one.
“This is fantastic news and shows the government has finally listened to FCSA’s many concerns regarding the public sector changes already in place, their devastating impact on the public sector and increase in non-compliant schemes that have resulted,” she said.
“It is very positive that the Government has not simply bulldozed ahead with legislation that would have a negative impact on the flexible workforce and the UK economy as a whole.”
However, Dave Chaplin, CEO and founder of online contracting site ContractorCalculator, said – even with the prospect of a consultation on the cards – the rolling out of the reforms to the private sector is likely to end up being an economic disaster.
“Rolling out the reforms to the private sector will be like pouring glue on the flexible economy,” he said. “Taxes will decrease as people move from lucrative freelancing to lower paid permanent work, and the cost of hiring the remaining contractors will rise as rates go up due to changes in supply and demand.”
“Business will have less agility by not being able to access UK freelancers in any easy way, and many will turn to online freelance portals to hire freelancers overseas – without the red tape burden associated with IR35. [It will be a] complete and utter disaster for UK Plc.”