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IR35 reforms: Contractors lack confidence in private sector to manage April 2020 rule change

Research from IR35 consultancy Qdos suggests contractors lack confidence in the ability of private sector firms to adequately determine how they should be taxed after April 2020

Contractors lack confidence that businesses will be able to accurately determine how they should be taxed, once the revamped IR35 rules are extended to the private sector in April 2020.

More than three-quarters (77%) of the 1,400 contractors who took part in a recent poll by IR35 consultancy Qdos said they have little to no confidence that private sector organisations will be ready to manage their new-found responsibilities once the revised IR35 regulations come into effect.

As is now the case in the public sector, from April 2020 private sector organisations that engage with contractors will be responsible for determining whether or not the work they do for them means they should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).

At the moment, it is up to contractors to self-declare if the engagements should be classified as inside or outside IR35, which determines whether or not they should be exempt from having to make PAYE tax and National Insurance contributions.

The IR35 rules will only apply to large and medium-sized private sector firms, the government confirmed during the Autumn Budget 2018, but only 12% of participants in the Qdos poll believe businesses will be ready to take on the additional administrative responsibilities the reforms will require of them.

IR35 drove IT contractors away from public sector

When similar reforms were rolled out to the public sector in April 2017, there were numerous reports of IT contractors having their tax status misclassified and walking away from projects, and of organisations undertaking blanket determinations in an attempt to ease some of the administrative burden involved.

According to an investigation by Computer Weekly, in the wake of the public sector reforms, some government departments lost up to 40% of their IT contractors, resulting in project delays and cancellations.

Even so, HM Revenue & Customs (HMRC) – which is responsible for overseeing the changes – has repeatedly hailed the initiative for reducing tax avoidance in the public sector.

Indeed, government figures suggest the move has generated around £550m in additional tax revenue for the Treasury, while its five-year forecast suggests extending the move to the private sector should bring in more than £3bn by the 2023-24 financial year.

Even so, Qdos CEO Seb Maley said the fallout from the public sector roll-out is still looming large for a lot of contractors, which is why so many have misgivings about the government’s plans to repeat the process in the private sector next year.

“Thousands of contractors have been wrongly placed inside IR35 by public sector engagers as a direct result of reform in 2017. Understandably, this has led many independent workers to question whether the private sector will be in a position to administer IR35 accurately next year,” he said.

“Private sector clients and recruitment agencies would be wise to pay attention to what are justified concerns of contractors. Businesses rely on the flexibility of the independent workforce, while the recruitment industry, which now finds itself caught up in IR35 reform, depends on contractor placements for most of its turnover.”

Businesses need time to prepare for IR35

While the private sector has just over a year to prepare for the reforms, members of the IR35 Forum stakeholders group, which includes representatives from industry bodies such as the Association of Independent Professionals and the Self-Employed (IPSE), have previously made the point that “detailed preparations” will be difficult to get under way until HMRC gives them sight of the draft legislation.

“There’s no reason to believe reform will differ much [between the private and public sectors]. After all, HMRC is mistakenly under the impression that public sector reform has been a success”
Seb Maley, Qdos

As outlined in the minutes from the IR35 Forum’s most recent meeting in November 2018, the draft legislation for the private sector IR35 reforms is not expected until the summer, which will set out how firms are expected to comply with its requirements.

Delays in the publication of the final legislation for the public sector IR35 reforms, as well as the relatively late arrival of HMRC’s “check employment status for tax” (CEST) tool, were blamed by stakeholders in the run-up to the April 2017 reforms for inducing panic in the public sector, as it left them with little time to prepare.

“While the specific details of the legislation are yet to be published, medium and large companies do at least know they will be responsible for administering IR35 from April 2020, so they can start to prepare. That said, the sooner the actual legislation lands the better,” said Maley.

“The findings from the IR35 consultation are due to be released this month and are expected to inform the Draft Finance Bill, so before long, we should have a better idea of what the government has in mind.

“I don’t expect HMRC to have been too imaginative though. Apart from the fact that changes will apply to medium and large companies in the private sector as opposed to every engager in the public sector, there’s no reason to believe reform will differ much. After all, HMRC is mistakenly under the impression that public sector reform has been a success.”

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