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IR35 reforms subject to pre-Budget inquiry as self-employed hit by crisis of confidence

The House of Lords’ Economic Affairs Committee is calling for an immediate inquiry into the real-world impacts of the IR35 reforms on private sector businesses and contractors

IT contractors are being urged to participate in a pre-Budget 2020 call for evidence about how extending the IR35 reforms to the private sector is affecting the labour market, as research shows confidence within the self-employed sector will hit a six-year low.

As part of its annual, pre-Budget assessment of the draft Finance Bill, the House of Lords’ Economic Affairs Committee has requested an inquiry into how the soon-to-be introduced IR35 reforms will impact on private sector contractors and the companies who hire them.

The inquiry is being overseen by chair of the Finance Bill Sub-Committee, Lord Forsyth of Drumlean, who has called on those affected by the changes to submit written evidence by 25 February 2020.

“The Sub-Committee is interested to know about the real-life experiences of individuals and organisations, as well as more general responses – for example, relating to the impact of these (and predecessor measures on tax classification of workers and the broader impact on the labour market,” the Sub-Committee said, in a statement.

The IR35 reforms are due to come into effect on 6 April 2020 and will see medium-to-large private sector organisations assume responsibility for determining how the contractors they engage with should be taxed, based on the work they do and how it is performed.

Previously, it was down to the contractors themselves to declare if they should be taxed in the same way as salaried, permanent employees (inside IR35) or as off-payroll workers (outside IR35).

As such, an inside IR35 determination means that contractors will be expected to make National Insurance Contributions (NICs) and pay other employment-related taxes as a permanent employee would, while outside IR35 contractors do not. 

Private sector reforms

In a guidance note, the Sub-Committee also shed some further light on other areas it is keen to explore during its work, including whether or not the impact of extending the reforms to the private sector has been “adequately assessed” from a cost and administrative burden perspective.

“The Government is proposing to extend the off-payroll working rules to large and medium-sized organisations in the private sector. We are interested in how this change will work in practice, and how it relates to wider changes in working arrangements,” said Forsyth.

“To inform our work we want to hear from as broad a range of people and organisations as possible. If you have a view on off-payroll working rules, please let us know what you think.”

As previously detailed by Computer Weekly, the lead up to the reforms coming into play has caused a number of high-profile enterprises to announce blanket bans on using contractors as a means of side-stepping the reforms, with many seeking to phase them out of their businesses by the end of February 2020.

In almost all cases, affected contractors are being told they can either re-engage with the companies through a pay-as-you-earn contract or by working through an umbrella company.

At the moment, the implications of these decisions remain to be seen, although speculation is rife that it could lead to a mass exodus of IT contractors from private sector firms, and a spike in the insolvency rates of limited companies in the months to come.

Read more about IR35 and loan charge news

According to research from the Association of Independent Professionals and the Self-Employed (IPSE) and PeoplePerHour, the uncertainty caused by the IR35 reforms has led to a downturn in confidence within the self-employed sector.

The pair’s research shows self-employed, freelance workers are suffering from a crisis of confidence about how their businesses will fair over the next three months, with their data suggesting confidence within the sector is due to hit a six-year low.    

This situation may also have been exacerbated by another finding that shows freelance earning dropped by 6 per cent during the current quarter, with many within the sector anticipating a further downturn in their take home pay in the months to come.

Inna Yordanova, a senior researcher at IPSE, said the downturn in confidence is seen within the self-employed sector does appear to be linked to the looming onset of the IR35 reforms.

“The drop-in freelancers’ business confidence is all the more striking because it comes at a time when their confidence in the wider economy is actually starting to recover. This alarming slump in freelancer confidence should be a wake-up call to government. The changes to IR35 are causing alarm right across the freelance sector and they should be halted before they do serious damage to this vital part of the workforce.”

Xenios Thrasyvoulou, founder and CEO of PeoplePerHour, added: “I am disappointed, but not surprised, to see another fall in freelancer confidence this quarter, to the lowest in six years. It seems that whilst freelancers are more confident about the wider economy, their confidence in their own industry has fallen off a cliff, thanks to the IR35 changes coming into play in April.

“There is still a chance for government to address these issues and listen to the concerns of this important industry, before more damage is done,” he said.

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