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IR35: A Sledgehammer to Crack a Nut?

As govt considers extending IR35 to private sector, Cedar Consultant CFO shares his misgivings.

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Stephen Perrin IR35


As govt considers extending IR35 to private sector, Cedar Consultant CFO shares his misgivings.

In April 2017, the introduction of the off-payroll working regulations – the latest incarnation of IR35 - turned contracting in the public sector on its head. Now, before the dust has even settled, a government consultation is reviewing their extension to the private sector.

I’m the first to admit that – since the tax is lower and there’s little chance of being caught – the previous system made it far too tempting for unscrupulous contractors to ignore IR35 by taking dividends rather than a full salary from their PSCs. And similarly, with reports that non-compliance will cost £1.2 billion a year by 2022/23, I’m fully behind Mel Stride, Financial Secretary to the Treasury, when she says that we need “a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services”. Unfortunately, however, I’m not convinced that extending the same or similar rules to the private sector fulfils any of these criteria. Or, to be honest, that it’s even asking the right questions.

In fact I’m not confident that those behind the rules actually understand how contracting really works. While it’s true that most limited company contractors will earn more, and have a lower tax percentage, than PAYE employees, public sector contractors who fall within IR35 now face the costs, risks and obligations of being self-employed, with none of the benefits, security, or rights of being an employee – while still being taxed as if they were.

Following a cursory glance, it may indeed appear that a contractor working four days per week for the same company for one year is an employee. But most contractors in this position still need to maintain their own email address and website, pay for professional indemnity and public liability insurance and accountancy fees, and make their own pension contributions – ones with no generous ‘top-up’ from their employer. And that’s before we even mention sickness, holiday, maternity or paternity rights and payments.

To this already nerve-inducing mix, IR35 adds an extra layer of risk. At least in the public sector, it’s a case of ‘when’ not ‘if’ you’ll be paid; in the private sector, however, there’s always the possibility a company might go bust and either not pay you or not pay your PAYE liability. And, even if they don’t go bust, under the new regulations any contractor that already has their own company will face a very difficult choice: utilise an umbrella company, go on the payroll of the end user or recruiter, or face considerable delays in being paid as fees will have to pass first through payroll and then through accounts. Either way, they’ll be left with less take-home pay than an equivalent on-payroll worker, especially after taking into account trading costs, which don’t simply stop because one assignment or engagement is classified by HMRC rules as being within IR35!

Under IR35 it’s up to the client or hirer, rather than the contractor, to determine whether their role falls within the regulations, and each contract must be decided on a case-by-case basis. As companies are liable for any missing tax if they make the wrong call, I suspect they’ll tend to err on the side of caution – which is what makes me question HMRC claims that the reform has increased compliance, citing as evidence that 58,000 more public sector workers have been paying income tax and NICs since April. Such figures should be treated with considerable caution, as a significant number of these may have been brought inside IR35 either in error or by blanket policy.  

In my view, the reform is simply unworkable in the private sector. Contractors are often taken on for one role that expands into a second and even a third and, in their current form, the rules simply aren’t flexible or agile enough to reflect this. Or, to give another example – extreme, admittedly, but it does illustrate some of the shortcomings – say you employ a gardener one morning a week but they use your lawnmower. Does that mean you’ll now be responsible for ascertaining their status, running payroll, deducting NI and PAYE and then paying it to HMRC?

In addition, I’m not convinced that the results from the public sector have yet been subject to rigorous scrutiny. Although HMRC estimates that an additional £410 million has been raised in income tax and NICs, this amount can’t be assessed until it’s placed alongside an increase in public sector costs (approximately a third of respondents noted an increase in costs as well as finding it more difficult to recruit) and corporation and self-assessment tax payments – and figures for the latter are not due for release until January 2019. Furthermore, HMRC appears to have been notably selective in the research it commissioned, not commenting at all upon how many or how difficult public sector authorities have found implementation of the back-stop provision of payrolling and then paying PSC contractors.

What I find most frustrating is the fact that the removal of flat-rate VAT and reducing the difference between PAYE and dividend earnings was already levelling the playing field. All without complex rules, increased administration or the need to disadvantage contractors compared to their employed equivalents.

In other words, a simpler solution already exists. One that would be easier for HMRC, easier for the accountants who complete contractors’ tax returns, and easier for clients, agencies and contractors themselves.


To discuss how Cedar can help you to tackle the complexity threatened by IR35, call now on 0203 002 8050. We offer the facility for contractors to be paid via our own PAYE payroll, or through a small selection of umbrella company providers who are currently exempt from the regulations.