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The government stands accused of downplaying the dampening impact the incoming IR35 reforms are having on the private sector’s appetite for hiring limited company contractors, in its response to the Finance Bill Sub-Committee’s recent inquiry to the changes.
In an eight-page document published on Wednesday 16 July 2020, HM Revenue & Customs (HMRC) and HM Treasury shared their take on the findings of the House of Lords’ Finance Bill Sub-Committee’s inquiry into the challenges contractors and private sector firms are facing as they prepare for the onset of the reforms.
The document reiterates the government’s commitment to honouring the April 2021 start date for the reforms, on the basis that many of the medium-to-large private sector firms within its scope had already begun preparing for the changes when they were originally set to go ahead in April 2020.
This roll-out date was delayed by 12 months in response to the onset of the Covid-19 coronavirus pandemic, with the government claiming it would be inappropriate to proceed due to the economic fallout caused by the virus.
“Any additional delay would have significant drawbacks,” said the government in its 15 July 2020 statement. “It would not address the fundamental unfairness of taxing two people differently for the same work, and it would further prolong the disparity between the private and voluntary sectors and the public sector, where the rules have been in place since 2017.
“There is a risk that this continuing disparity could begin to cause retention difficulties in the public sector, as contractors may choose to accept only private sector contracts, as well as being unfair to contractors working in the public sector.”
As a result, the roll-out of the reforms in April 2021 will see medium-to-large private sector firms assume responsibility for determining how the contractors they engage with should be taxed based on the work they do and how it is performed.
Currently, it is down to the contractors to self-declare whether or not their working arrangements mean they should be taxed in the same way as permanent, salaried employees (inside IR35) or as off-payroll workers (outside IR35).
In the run-up to the original roll-out date, there were numerous reports of medium-to-large private sector firms opting to reduce their reliance on limited company and personal services company contractors to avoid or minimise the additional administrative burden this change in responsibility was expected to usher in.
The Sub-Committee’s inquiry flagged this behaviour as a concern, and HMRC and the Treasury acknowledged that in its response, while also seeking to make the point that there are range of business factors that might compel companies to restructure their workforces in this way.
“The government acknowledges that, as a result of the changes to the off-payroll working rules, some organisations are taking the opportunity to consider whether personal service companies are the best way of engaging individuals who are working like employees,” the response stated.
“This is a business decision about the most effective way to structure their workforces. It is important to also note that these commercial decisions are driven by a wide range of factors, such as changes in technology, markets and wider business and labour market practices, and will not be made purely for tax reasons.
“However, as was the experience in the public sector, this does not suggest that there is an overall reduction in the demand for the skills and services contractors offer as a result of these changes.”
Dave Chaplin, CEO of the contractor-focused consultancy firm ContractorCalculator, said the government’s response – as a whole – lacks substance, and its efforts to downplay the impact the reforms are having on the hiring of limited company contractors is insulting.
“The claim that firms have not decided to ban the use of limited company contractors because of these tax reforms is derisory. It’s well-known that it is the primary reason for a number of firms, including all in the financial sector, with many now moving lots of their project work abroad,” he said.
In the concluding paragraphs of the government’s response, HMRC and HM Treasury said it backs the Sub-Committee’s view that the 12-month delay to the rolling out the reforms should be used “productively and effectively”, and makes the point that HMRC has taken steps to ramp up support to help businesses prepare.
“The government has simply paid lip-service to the fundamental flaws of the reforms pointed out to them by the Lords. The report lacks any substance and gives light promises that HMRC will work to help businesses to prepare. Don’t hold your breath,” Chaplin added.
“They [HMRC and the Treasury] can make as many assurances as they want – the legislation is set to have a hugely damaging effect on contractors, the firms that hire them and the economy as a whole.”
Seb Maley, CEO of contractor tax consultancy Qdos, said very little of what the government has pledged to do in its response to the inquiry is new.
At the same time, there is little in it that suggests the government has any interest in addressing how it intends to ensure the changes do not lead to inside IR35 contractors ending up as “zero-rights” employees – in that they will end up having to pay the same amount of tax as a permanent employee, but will not be eligible to any of the same workplace benefits salaried workers are entitled to.
“It’s clear from the government’s response that it still has its head buried in the sand when it comes to IR35, with recommendations in the Lords report having been all but ignored. From what I can see, the few promises made by the government have been made before, with no positive change resulting from them,” he said.
“The government hasn’t directly addressed the issue of zero-rights employment either – an unfairness highlighted in the Lords report. This is an injustice that needs resolving immediately.”
Read more about IR35 in the private sector
- With six months until IR35 tax avoidance reforms are extended to the private sector, a number of financial services firms are thinning out their contractor workforce – is that the way to ensure compliance?
- While many firms have seized on the government’s decision to delay the roll-out of the IR35 reforms to rethink their approach, others are sticking by their decision to ban limited company IT contractors from their workforce.