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The government has started its consultation on whether or not to extend the IR35 tax avoidance reforms to the private sector, despite mounting opposition to the move.
The consultation is being jointly overseen by HMRC and HM Treasury, and is, as the 32-page document states, geared towards curbing the “growing cost” of IR35 non-compliance in the private sector.
According to the pair’s calculations, the cost of private sector non-compliance stands at £700m at present, and is forecast to increase to £1.2bn by 2022-2023, which is money that could be used to fund “vital public services”, the document states.
It also asserts that around a third of contractors who operate through a personal service company (PSCs) should be classified as operating inside IR35, when – in reality – just 10% are.
“Whatever the conclusion of the employment status consultation, the government is clear on the underlying principle that where an individual is working in the same way as an employee, they should pay broadly the same employment taxes as an employee,” the consultation reads.
The consultation is set to run until 10 August 2018, with a summary of the responses given due for publication later in the year.
Expanding the reforms
Depending on the consultation’s outcome, the proposals could see private sector organisations takeover responsibility for determining if the contractors they engage with should be taxed in the same way as salaried workers (inside IR35) or off-payroll employees (outside IR35). This has been the case in the public sector since April 2017.
On this point, the government said it is “committed” to learning from the rollout of the IR35 reforms to the public sector, which is known to have prompted IT contractors to walk off projects across various departments.
The reforms have, however, been successful in driving up compliance within public sector contractor circles, the consultation document claims, despite concerns about the additional administrative burden it has put on the public sector as a whole.
“Concerns have been raised, both in response to the consultation on the planned reform, and since its implementation, about the potential impact on UK labour market flexibility, and the administrative burdens on clients and agencies,” the report concedes.
“While the government takes these concerns very seriously, much of the evidence presented so far has been anecdotal, and has not matched HMRC’s own experience from working with public authorities as they have implemented the reform.”
To remedy this, the government said it commissioned independent, quantitative research to assess the impact of the reforms on the public sector. Its findings are summarised in the consultation document, as well as being published in full in a standalone document, and are based on the responses of 117 public sector bodies responsible for managing the administration of off-payroll workers.
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Just over half of participants (58%) said their ability to fill contractor vacancies had not changed since the reforms came into force in April 2017, whereas one-in-three (32%) said sourcing contractors had become more difficult as a result.
While 49% of respondents said they found the reforms “easy to comply” with, a “considerable proportion” experienced difficulties during the early stages, the consultation document states.
“The main difficulties were related to familiarisation with the public sector reform and resolving disputes with workers and agencies in the early stages of implementing those changes. The ability of public authorities to administer the off-payroll working rules in the public sector improved over time,” it states.
“It is the government’s assessment that the public sector reform has had the intended effect of improving compliance in the public sector, whilst recognising that public authorities and workers found some challenges in implementing the changes required,” the consultation document concludes.
Private sector pressure
Following months of speculation from contractor stakeholder groups, the government confirmed in the Autumn 2017 Budget that extending the IR35 reforms to the private sector could be on the cards.
The Association of Independent Professionals and the Self-Employed (IPSE) and the Freelancer & Contractor Services Association (FCSA) are fiercely opposed to the proposal, with both organisations expressing concerns over HMRC’s ability to handle such a large-scale move.
IPSE CEO Chris Bryce said extending the reach of the reforms would be a “fatal blow” to the flexible economy, and will serve undermine the confidence of the self-employed at the worst possible time.
“Undermining confidence in our flexible, self-employed workforce is the last thing the Government should be doing at this time of great uncertainty over Brexit,” said Bryce.
“How can the Government hold this anti-business consultation when it won’t even know the full tax implications of the changes made last year until people file their tax returns in January 2019?”
The impact of public sector reforms
Julia Kermode, chief executive of The Freelancer & Contractor Services Association (FCSA), also took further issue with HMRC’s assessments of how successful the public sector roll out has been.
“The reforms in the public sector have had a devastating impact, as has been widely reported,” she said.
“We disagree that public sector compliance has improved since the reforms were implemented; all that we have seen is an increase in numbers on payroll, which is not substantive proof that they should be there at all.”
News of the consultation comes hot on the heels of ex-Department for Work and Pensions contractor, Ian Wells, winning his IR35 appeal against HMRC, who claimed he owed the organisation £26,000 in tax after having his engagement with the department incorrectly classified as outside IR35.