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IR35 reforms: Economic concerns raised over prospect of private sector roll-out

With the government’s stance on rolling out the IR35 reforms to the private sector appearing to soften, IPSE and others air concerns over the threat this move could pose to the post-Brexit economy

Extending the controversial IR35 reforms to the private sector could do serious harm to the UK economy, with stakeholders cautioning the government against embarking on such a move.

Since the introduction of the IR35 tax avoidance reforms to the public sector in April 2017, the prospect of the government extending the changes to the private sector has been hotly debated by contracting stakeholders, with many considering it to be a case of when – rather than if.

If that were to happen, it means private sector companies would join public sector bodies in being responsible for deciding if limited company contractors should be taxed in the same way as permanent employees (inside IR35) or off-payroll staff (outside IR35).

In the run up to the Autumn Budget 2017, comments made by government officials about levelling the taxation playing field for public and private sector contractors have fuelled speculation even further, prompting stakeholders to speak out about how detrimental such a move could be.

Substantial upheaval has been caused in the seven or so months since the reforms came into force in the public sector, where they are known to have contributed towards mass walkouts of IT contractors at the Home Office, HMRC and other government departments.

For this reason, The Association of Independent Professionals and the Self-Employed (IPSE) is urging the government to hold off on any plans it may have to extend the reforms until a proper assessment of the impact the changes have had on the public sector to-date is carried out.

“There has not been a proper impact assessment of how the rules have worked in the public sector, so it seems reckless for the government to be thinking about pushing the same set of rules into the private sector when we know it has been so controversial,” Andy Chamberlain, IPSE’s deputy director of policy, told Computer Weekly.

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This, coupled with the economic instability already blighting the UK ahead of Brexit, means the government could end up doing untold amounts of damage to UK PLC by pushing through the reforms at this time, it is claimed.

“We know large businesses are reconsidering whether or not they are going to reinvest in the UK because they don’t know how Brexit is going to turn out, and now the government is looking to impose pretty difficult administrative burdens on any company that wishes to access the UK’s flexible labour market,” he said.

“So, our concern is not just that this is going to impact contractors negatively, but is definitely going to have a negative impact on the businesses that engage contractors and maybe even the economy as a whole.”

In protest at the prospect of the reforms being extended IPSE submitted its pre-Budget submission in September 2017, outlining its concerns, and its CEO has since followed this up with a letter to the Chancellor.

The organisation is also in the throes of mobilising its members to contact their local MPs over the matter, having already lobbied “key” Conservative MPs about the risk the changes could pose to the UK’s self-employed and flexible workforce.

“We want everyone to understand these rules are not easy to deal with and the idea that business should be suddenly lumbered with it is something I don’t think the government has properly taken into account,” said Chamberlain.

A subtle private sector shift

IPSE’s words of warning coincide with a subtle shift in rhetoric over the course of the past few months from the government, fuelling speculation the details of a possible private sector roll-out could be aired in the Autumn Budget.

Back in February 2017, ex-Financial Secretary Jane Ellison went on record, in response to a written question from Labour MP Tulip Siddiq, confirming the government has “no current plans to extend” the IR35 reforms to the private sector.

In response to a similar line of questioning during an IR35 Forum meeting in July 2017, HMRC said it would like to see “compliance improve” in the private sector, but its focus remains on “embedding” the changes in the public sector for now.

Comments made in October by Financial Secretary Mel Stride about the “fairness” of having public and private sector contractors working to different rules have since been seized upon by stakeholders as a sign the reforms will be extended sooner rather than later.

Behavioural change

In an interview with The Financial Times, Stride said the reforms have prompted “behavioural change” in the public sector, resulting in “far fewer” limited company contractors working there while the “behaviour” of those in the private sector remains “unchecked”.

He told the publication: “It is not just the issue of tax that we might not be collecting that we should be collecting. It is also an issue of fairness between the public and private sector.”

Computer Weekly contacted the Treasury to seek further clarification on Stride’s comments, while requesting an update on the government’s plans for IR35 in the private sector, but was told it has no response to share at this time.

Either way, the government’s changing stance on the issue is another reason why rushing to rollout the reforms to the private sector could be a disaster waiting to happen, said Chamberlain.

“When they originally brought in the public sector rules they said the government has no plans to extend them to the private sector, so many private sector organisations did not pay attention [to how things played out] because they were not impacted,” he said.

“Suddenly now, just six months later, they’re considering extending them to the private sector and that is going to cause big issues for business.”

Repeating problems

For that reason, David Chaplin, CEO and founder of tax advisory service ContractorCalculator, said extending IR35 to the private sector without giving firms plenty of time to prepare could result in a repeat of the problems the IR35 reforms caused in the public sector.

“HMRC have said there has been a bit of [contractor] churn, but there isn’t a problem with filling spaces or getting bums on seats, and – while a lot of IT contractors have been replaced – the [public sector bodies] but they can’t get the same high-calibre of people, and we all knew that would happen,” he said.

And this, in turn, could have a knock-on impact on the value for money the public sector gets from its IT investments in the future, said Chaplin.

“If you are a hirer and project manager and have never programmed yourself, you don’t know the difference between a good or bad programmer – you just see them as commodities,” he said.

“Some of the systems I’ve seen over the years, built by people who don’t know what they’re doing, and then they have to be ripped out and replaced – and it’s just awful.”

Calls for consultation

Given how unengaged the private sector has been in the discussions about the public sector IR35 reforms, a full consultation and a lengthy lead-time would be required before any changes came into force to give SMEs and enterprises plenty of time to prepare, said Chamberlain.

“If they were to bring this in and say, ‘we’re just extending the rule so we don’t need to consult’, I think that would really annoy a lot of businesses that use flexible labour as a crucial part of how they operate,” he said.

“There is a danger the government would think this would be an easy thing to do from their point of view, but what they wouldn’t be taking into account is that it would be anything but easy for all the businesses in the UK that use independent contractors to do any aspects of work for them.”

There is a fear among the contracting stakeholder Computer Weekly has spoken to in recent weeks that, if the Chancellor decides to use the November Budget to announce an extension, the changes could come into force in the private sector as early as April 2018.

“If they were to consult on this properly, I think they would not be able to do this by 2018, and I would hope the government would do a proper consultation with a long lead time to allow businesses to catch up with these rules,” said Chamberlain. “It will be a complete mess if they do it sooner than that. It will be a complete mess anyway.”

Fierce opposition

There is a strong likelihood the government will face much fiercer opposition to rolling out the changes to the private sector than it did in the public sector, which is why a consultation would be prudent, added Seb Maley, CEO of tax advisers QDos Contractor

“There will be resistance, from IPSE and other trade bodies, but in the public sector there wasn’t a lot of resistance from the public sector bodies [directly] because they [have] to be aligned with what the government wants them to do,” he said.

In the private sector I imagine there will be a strong level of resistance from businesses – the engagers – and they will have far louder voices than the public sector, and there will be far more resistance.”

Rushing through the legislation

There is also a risk that the government may simply carry out a “copy and paste” to create the supporting legislation for a private sector roll-out, in a bid to push the changes through as quickly as possible.

“If Hammond decides to roll this out for 2018 it would be a car crash, because every single business that hires someone else on a flexible basis has to be assessed, and that’s tonnes of transactions,” he told Computer Weekly.

“We’re a services-based economy, and they would be asking every single business that hires somebody else to assess their status. It’s just bonkers – they won’t know how to do it and there will be a massive enforcement problem because it will be so hard to police.”

While it remains to be seen if extending the off-payroll working rules to the private sector will emerge as a major talking point of the Autumn Budget 2017, Maley said it is almost inevitable – in light of the change in messaging on this – the government will eventually.

“Even if there isn’t an announcement on Wednesday [22 November], people need to gear up for the potential for it to happen because it is going to happen at some point in the near future,” he said.

Benefits for the contractor community

And, providing the private sector is given ample warning and time to adjust, Maley said extending the reforms could bring some benefits to the contractor community, in terms of how the work they do is perceived and how they are treated by the organisations they work for.

“What I hope to see is a bit of a step change from businesses actively trying to adapt their working and business practices to ensure those workers are able to continue to work outside of IR35,” said Maley.

“We did see aspects of that in the public sector, and it changed the way they spoke about them and internally dealt with them to make sure there were clear demarcations between the contractor and an employee, which is something contractors have been calling out for years,” he said.

“I’m genuinely hopeful most businesses will be pragmatic and reasonable about it, and they’re not going to knee-jerk because it’s quite clear the damage that caused in the public sector.”

Indeed, organisations making blanket determinations about the IR35 status of their contractors is an approach Computer Weekly is aware a number of public sector bodies took in their rush to achieve compliance, with anecdotal reports linking the practice to IT contractors leaving some departments en-masse.

Given how the reforms turned out in the public sector, the private sector may be compelled to make more of an effort to retain the contractors who are likely to be affected. “It could be a positive for IT contractors and other white-collar workers who do have skills and expertise, who are not controlled by the person they work for,” said Maley.

“Rather than engagers and businesses being completely oblivious to IR35 and the risks contractors faced over the years, they’re still going to want to retain those workers.”  

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