The topic on the lips of many employment agencies and contractors has reared its head again over the last couple of weeks with the founder of ContractorCalculator, Dave Chaplin, warning that changes similar to those introduced into the public sector in April of last year could be extended to the private sector from as early as April next year. The claims were made following an extensive examination of the minutes of the latest meeting held by the IR35 forum, a group of external stakeholders who meet regularly with HM Revenue & Customs with the premise to make clear improvements to administration of IR35. It is also likely that the chancellor, Phillip Hammond, will raise the issue again in his Spring statement speech on 13th March 2018.
The potential outcome of the consultation is that contractors who operate through their own limited companies will have to either become employees of the company that they are contracted to or have their pay processed through an umbrella company payroll, meaning that they lose the benefits of being paid by dividends from their own limited companies.
In his article, Mr Chaplin went on to say “Stakeholders and members of the forum have been very vocal in expressing their concerns that with the public sector reforms less than a year old, any assessment of the effectiveness of the reforms is premature. What’s more, all are agreed that with the Taylor Review due out and IR35 should be considered holistically. However, HMRC doesn’t see the correlation. It’s farcical.”
If a change in the rules does come in to play, the effect will be that the private company end clients will be responsible for determining whether a worker, who operates through a personal services company or intermediary, is caught by IR35 or is genuinely self-employed. The goal posts will therefore be moved from self-assessment to being assessed. If the private sector take the same blanket approach that we have seen across the public sector, then the personal services company will be pretty much a thing of the past. The administrative burden that will be placed on the deemed employer will be so great that they will more than likely take the approach that assessing is far too much work and therefore they will make everyone be paid via payroll. There have been a number of issues raised with HMRC’s ‘Check Employment Status for Tax tool’ in that it is not flexible enough to take specific scenarios into account, business owners and their accounts teams aren’t going to want to spend unnecessary time in reviewing individual cases.
The effect will be that the fee payer will be responsible for deducting, and paying to HMRC, PAYE and National Insurance. In a number of cases that will be the recruitment agency, meaning that they will be faced with yet more administrative burden. Not to mention the additional auto-enrolment duties.
The perceived cashflow benefit to HMRC of taking this course of action is estimated to be over £1bn by 2022/23 so it is easy to see why they are looking to push so many contractors onto the payroll. Companies in the private sector will however be less agile by not being able to access UK freelancers as easily as they did before. The red tape burden associated with IR35 would be very damaging for firms that rely on easy access to freelancers. The overall cost of hiring contractors will rise as the additional tax burdens will be borne by hirers who will have to pay higher fees for their contractors.
What is clear is that the chance of any agreement between the private sector and HMRC in this matter is extremely unlikely. IR35 has been rumbling on in the background for a number of years and the likely scenario is that within the next year or so a conclusion may well be forthcoming. Whatever the outcome, you will have to ensure that you are prepared for whatever changes are necessary to keep your business profitable and flexible. I will be writing a further article once the proposals become clearer.
In the meantime, if you would like further advice contact our recruitment sector helpline at firstname.lastname@example.org.