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IR35: It’s the final countdown, but are we ready to deal with the consequences?

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Louise Gapp Supply Chain, Part-qualified & Transactional Finance, Recently Qualified Finance...

The activation date is fast approaching for the new IR35 legislation, which will hold public sector clients responsible for ensuring the compliance of their contractors. The new rules will apply to all payments after 6th April, regardless of when work was carried out. Many industry experts have questioned if the market is ready for the changes; I would dispute whether HMRC itself is prepared for the potential consequences of its new money-saving venture.

Cedar, like all industry representatives, is sympathetic to the aim of preventing tax avoidance; official reports describe losses of £400million attributed to personal services companies (‘PSCs’). However, the updated IR35 legislation has faced justified criticism for the danger it poses to the vitality of the UK’s flexible workforce. Given widespread suspicion that similar legislation will be inevitably rolled out to private sector contractors in the near future, it is not unreasonable to consider IR35 a threat to the future of all flexible working.

Alongside the changes announced in the 2016 Budget was an assurance of the Treasury’s commitment to develop a “clearer and simpler set of tests and online tools”, helping businesses check the IR35 compliance of contractors. HMRC’s new assessment tool, presumably an updated version of the Employment Status Indicator, is projected to launch in February or March, alarmingly near to the April activation date. Early communications suggest that the tool will likely classify the vast majority of assignments as inside IR35, and many are concerned that it will be inevitably biased towards collecting as much tax as possible. It is also possible that the tool may be ignored by risk-averse public sector bodies, who may favour all-encompassing policy changes rather than bearing the risk of miscategorising. The recent decision by Transport for London (‘TfL’) to impose a blanket ban on contractors operating as PSCs, effective from 17th February, suggests early evidence for this trend.

Even if other public sector bodies do not follow TfL’s example, the impact of their new tax responsibilities, and likely rise in contractor day rates, will place further strain on already-struggling organisations. With increased pressure on the public sector from austerity, as well as financial and political uncertainty, a flexible workforce is even more crucial. As well as threatening the viability of their work, HMRC’s renewed targeting of PSCs suggests an accusatory feeling towards contractors, who provide much-needed support in both public and private sectors. Cedar anticipates that amid the uncertainty of Brexit and global political upheaval, many businesses will be eager to recruit interim experts and advisors to guide them. IR35, especially if extended to the private sector, will complicate this process, and recruiters’ roles in facilitating it, potentially damaging the resilience of the UK economy.

Like other industry representatives, I am fearful that IR35 signals the beginning of the end for temporary contractors in the public sector. Although its aim is to save the government money is noble, I doubt if this expectation can be realistic, given the projected damage to the flexible workforce. It is unclear how HMRC intends to handle the pushback likely to arise from unfair classification challenges, and indeed whether it will have the resources and personnel to do so effectively. Despite HMRC’s best efforts to ease the blow with new technology, IR35 could be a step back for the modern world of work, making the future seem more uncertain than ever.

Are you ready for IR35? We’d love to know what you think.

 

Disclaimer: The issues discussed here are not exhaustive; Cedar would advise businesses to seek independent financial and legal help to determine tax status and decide on future action.