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The government confirmed in the Autumn 2018 Budget that it will press ahead with extending the highly controversial IR35 tax avoidance reforms to large and medium-sized private sector firms by April 2020.
Chancellor Philip Hammond outlined the rationale behind the move in the Budget 2018 red book, claiming it would help bring the private sector into line with how public sector bodies and agencies determine the tax status of the contractors they engage with.
“To help people comply with the existing rules and bring private sector organisations in line with public sector bodies and agencies, the government will reform the off-payroll working rules in the private sector,” the document confirmed.
In April 2017, public sector organisations assumed responsibility for determining whether or not contractors they engage should be treated as off-payroll workers or full-time, salaried employees when paying tax. Previously, it was up to the contractors to self-declare their tax status.
The government claimed the move had helped curtail tax avoidance within public sector contractor circles, and generated £550m in additional tax revenue for the Treasury. It is now setting its sights on achieving similar results in the private sector by making large and medium-sized businesses responsible for deciding how the contractors they use should be taxed from April 2020.
According to the government’s own five-year forecast, extending the changes to the private sector is expected to generate just over £3bn for the Treasury by the 2023-24 financial year, marking out the move as the single biggest tax-related revenue-raising element of this year’s Autumn Budget.
Stuck on repeat
In acknowledgement, perhaps, of the problems various public sector organisations ran into when trying to adhere to the reforms ahead of the April 2017 roll-out, the red book moves to assure affected businesses that guidance and support will be offered to ease them through the transition.
“To give people and businesses time to prepare, this change will not be introduced until April 2020. Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation,” the red book stated.
As reported by Computer Weekly ahead of the April 2017 roll-out, in the rush to comply with the public sector reforms, numerous reports emerged of organisations taking a “blanket determination” approach to deciding how their IT contractor workforces should be taxed.
Instead of assessing the engagement of each one of the contractors they use on a case-by-case basis, as per HMRC’s guidance, some organisations determined that all their contractors should be treated as salaried workers (inside IR35), rather than off-payroll workers (outside IR35).
As a result, this means they would be liable to make the same tax contributions as full-time employees, while being precluded from receiving other workplace benefits such as paid holiday and sick leave, for example.
In response, reports emerged of IT contractors leaving government organisations, with a Computer Weekly investigation – in the wake of the public sector reforming coming in – revealing some departments lost up to 40% of their IT contractors.
The impact on SMEs
While the private sector extension is solely focused on clamping down on non-compliance among contractors working for large and medium-sized businesses, it will have huge implications for the small business community, warned Chris Bryce, CEO of The Association of Independent Professionals and the Self-Employed (IPSE).
Particularly as the contractors on which these large businesses will be making judgements will invariably be self-employed, “one-man bands”, who make up the majority of the UK’s flexible workforce.
Chris Bryce, IPSE
For this reason, Bryce labelled the move a “short-term tax grab” that could do lasting damage to the economy by “taxing out of existence” the UK’s “smallest and most agile” businesses.
“The self-employed contribute a staggering £271bn to the UK economy each year, and give the country one of its greatest competitive advantages – flexibility,” said Bryce, in a post-Budget statement.
“The off-payroll rules are so complex and crude that genuinely self-employed people will be swept up by the government’s smash-and-grab mentality, and in many cases taxed out of operation.”
The IPSE, whose members include contractors, freelancers and self-employed individuals, has repeatedly spoken out against the proposals, out of concern for the impact they might have on the productivity of the UK’s flexible workers and, in turn, the economy at large.
“These measures are also profoundly anti-business and anti-competitive. Large, multinational companies which engage contractors will now have the power to unilaterally alter the tax affairs of the smallest businesses – the self-employed,” he said.
“This will have a chilling effect on entrepreneurialism in the UK: if you’re thinking about striking out on your own, as a white van man or a one-woman band, you’ll always be looking over your shoulder, wondering when the government will be coming after you,” he said.
“The fight against this crude and unworkable policy isn’t over. For the sake of the UK economy, IPSE will continue to stand up for fairness and do everything it can to prevent the government from taking a wrecking ball to the UK’s flexible workforce.”
Laying the groundwork
Julia Kermode, CEO of The Freelancer & Contractor Services Association (FCSA), has taken a more sanguine view of the proposals, on the basis the 2020 launch date means there is time to ensure the implementation is done correctly, and enterprise IT departments can prepare accordingly.
“Large businesses are precisely the ones that are least well-placed to accommodate the change due to the impact on their IT infrastructure should they need to process deemed payments to their contractors,” she said.
“The reforms dictate complexities in paying off-payroll workers’ invoices that require both accounts payable and payroll software to talk to each other – functionality that most large businesses simply do not have.
“To achieve this will require a significant IT development programme, so an 18-month lead time will be welcomed, I’m sure.”
Particularly, as Kermode pointed out, when the private sector reforms finally come into effect, many of the enterprises affected will be dealing with the fallout from Brexit.
“Businesses will need to start planning their IT development very soon, at the same time as grappling with the implications of Brexit. The government claims to be supportive of businesses, but it is not making things easy for them,” she said.
Read more about IR35
- The Association of Accounting Technicians (AAT) cautions HM Revenue & Customs against rushing out IR35 reforms to the private sector, claiming it will take most businesses at least one tax year to ready their software systems for the move.
- As the government prepares to close its consultation on extending the IR35 reforms to the private sector, IPSE airs concerns over the economic impact the move could have, as talk of a no-deal Brexit for the UK continues.