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The government risks destabilising the “fragile” UK economy even further if it presses ahead with using the IR35 regulations to curtail tax avoidance in the private sector, as the prospect of a no deal Brexit continues to loom large.
That is according to Andy Chamberlain, deputy director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), who claims extending the IR35 reforms to the private sector could cripple the flexible labour market at a time when the UK economy is already teetering on the edge.
“The economy is in a fragile state, the pound is extremely weak against bench-marked currencies and we still have an interest rate that is historically low,” he said.
“Against this backdrop of economic uncertainty, the government needs to prioritise the issues it takes forward, and moving ahead with a measure that will restrict the UK’s flexible labour market – one of our greatest economic advantages – risks damaging the economy at a time when it is already challenging for businesses.”
Particularly, he continued, as the UK is staring down the possibility of crashing out of the European Union (EU) with a no deal Brexit.
“We believe the IR35 proposal would be damaging whenever it is introduced, but it must now be considered in the context of Brexit,” he added.
IR35 consultation closing date
Chamberlain’s comments come just days before HMRC’s consultation on extending the IR35 reforms to the private sector is due to end on 10 August 2018.
If the government decides to press ahead with the move, it is expected the requirements will be broadly the same as the ones the public sector has had to adhere to since 6 April 2017.
The reforms have heralded a shift in who gets to declare whether public sector contractors should be taxed in the same way as permanent employees (inside IR35), or classified as working off-payroll (outside IR35), meaning they are exempt from making PAYE and National Insurance contributions.
Previously, it was the contractors’ responsibility to self-declare their tax status, but – since April 2017 – it has been up to the public sector organisations who hire them to make that call, on the understanding they will assess each engagement individually when making their decisions.
“It is a huge imposition to put onto [private sector] businesses: to say to them, there is this really difficult thing called IR35 you’ve probably never heard of, we now want you to consider the IR35 status of all your payroll engagements,” said Chamberlain.
“And by the way, if you get it wrong we’ll come after you for tax. It’s really dumping them with a huge amount of administrative burden and cost, which businesses don’t need at this time.”
Public sector reform review
In the run up to the public sector reforms coming into play, numerous reports began to emerge about how – in the rush to hit the 6 April 2018 compliance deadline – organisations were making “blanket determinations” about contractors they work with, ruling them all to be inside IR35, without taking time to assess each case individually.
This is thought to have contributed to IT contractors walking out en masse from projects at Home Office, HMRC and parts of the Ministry of Defence, while a Computer Weekly investigation suggested in June 2017 that some departments lost up to 40% of their IT contractors as a result of the reforms.
Despite evidence to the contrary, HMRC has repeatedly played down the impact the changes have had on the public sector at large. The private sector consultation document, for example, states that a lot of the reported impacts had “not matched HMRC’s own experience from working with public authorities as they have implemented the reforms coming into play”.
Cutting the cost of non-compliance
According to HMRC and HM Treasury’s calculations, the cost of non-compliance on IR35 in the private sector is around £700m at present, and is forecast to increase to £1.2bn by 2022-23 unless action is taken to address the issue.
For HMRC and HM Treasury, this means “continuing to tinker around with IR35”, said Chamberlain, when there are other ways of achieving the same result that would be “better for business, simpler to operate and generate more revenue”.
These include an idea first mooted by IPSE and EY several years ago, that involved the creation of a new limited company designation that would be specifically targeted at freelancers, offering them limited liability status, simpler tax treatment and a minimum salary guarantee.
Despite the concept winning praise from the Office for Tax Simplification, the idea is dismissed in the 30-page IR35 private sector consultation document, with HMRC claiming it would “create a new tax regime, rather than improving compliance with the current rules”.
The declaration is proof, said Chamberlain, of the government’s unwillingness to consider more “imaginative and radical ideas” when establishing the taxation boundaries for off-payroll workers.
“Instead, they’re sticking with these IR35 rules – which have always been steeped in controversy, that no-one really understands and everyone hates to try to operate – rather than thinking of better ideas and ways around this,” he added.
While the outcome of the consultation is unlikely to be made public for some time, Chamberlain said IPSE is continuing to encourage the contractor community to mobilise and make their concerns known to their local members of Parliament (MPs).
“The more we can make backbench MPs, in particular, aware that there are big concerns out there about this proposal, the more likely it is to face political challenge when it comes to pushing the legislation through,” said Chamberlain.
“The government doesn’t have a very big majority at the moment, so any kind of opposition could spell trouble for this and that is what we hope will happen, that enough MPs will see sense and realise this is not in the best interests of their constituents or UK businesses, and enough questions will be raised to make the government reconsider its approach.”
Computer Weekly contacted HMRC for a response to Chamberlain’s comments, and was told by a spokesperson the government will “carefully consider” all the evidence it receives in response to the private sector consultation before deciding how best to address the problem of non-compliance.
“It is not government practice to comment on responses received from individuals or individual organisations as part of a consultation,” the spokesperson added.
Read more about IR35
- HM Revenue & Customs hits back at contractors who claim it failed to test its online IR35 status assessment tool rigorously enough in the run-up to its launch in March 2017, as calls for an inquiry into its dev and test procedures grow.
- As the government continues to consult on extending the IR35 reforms to the private sector, research suggests contractors will not take kindly to the move.