IR35 reform plan: last chance for you to help stop it

I don’t often put my head above the parapet.

But the proposal from HMRC effectively to bar PSC contractors from working in the public sector from next April will create so many problems; be so disruptive to the contractor community and have such unintended negative consequences that I am urging both the recruitment and contractor communities to do everything in their power to stop it, writes the vice chair of the REC’s Tech Sector committee Les Berridge, of IT contractor jobs specialist Networkers.  

But you’ve only got a few hours to tell the taxman your view because the consultation closes today, August 18th, at 23.45. Before I share my view with you, please note this is purely a personal opinion piece and does not represent the views of either the REC or Networkers.

IR35 was initiated by Gordon Brown in 1999 primarily in an attempt to stop unscrupulous employers avoid paying ENICs by forcing people such as hairdressers and taxi drivers from doing a ‘Friday to Monday’ switch from PAYE to self-employed. Unfortunately the way it was framed brought limited company contractors into play and since then they have had to undertake and assess each contract, uncertain if they fall inside or outside, with subjective guidelines and interpretations which can vary from one tax office to another. On their own admission, HMRC have collected very little revenue from people found to be inside IR35 and have undertaken very few investigations each year. In addition, many contractors who have been ruled to be inside have appealed successfully against it. So we have limped on for 17 years with the unsatisfactory position of HMRC not actively enforcing a set of unclear guidelines and most contractors taking an ostrich-like view that the likelihood of investigation is so low there’s no need to worry.

All this started to change in 2012 when it emerged that Ed Lester, the then head of the Student Loan Company, was a limited company contractor. This clearly embarrassed the government and since then we have had legislation on offshore, onshore and umbrella solutions, so that nearly all contractors are now PSCs.

Although the business-side of the government pay lip service to the importance of the flexible, skilled workforce provided by the contractor sector, the Treasury and HMRC obviously feel they are avoiding paying their fair share of tax by working through a PSC. They really need to talk to each other. It is true that a PSC can retain a higher percentage of their gross payment than a PAYE employee but they do have to pay for their own training, pension and insurances as well as find a new job every six months or so. Choosing to be a contractor is a lifestyle choice, not a tax avoidance dodge and although it’s difficult to prove, it is widely accepted that the UK has come out of recessions faster because we have benefited from having a skilled freelance workforce.

To turn to the latest proposals (which you’ve got just a handful of hours to respond to HMRC about), it is unfair and unworkable to expect agencies to be responsible if a contractor is found to be inside IR35. The new software tool promised by HMRC is unlikely to be fit for purpose but is likely to be designed (like the Business Entity Tests) to find the vast majority of contractors to be inside. Agencies will therefore have no choice other than to offer contract work either on a PAYE basis (with none of the same benefits that perm employees have) or inside IR35. The net effect will be that professional contractors will only take assignments in the private sector.

However, there will still be a need for contingency specialist help in the public sector, for the same reasons they have always needed it and the only solution available will be to bring in consultancies, which cost far more than individual contractors, hired from pre-vetted, approved agencies at agreed mark-ups.

Finally, HMRC have given no guarantees that they won’t ultimately take the same approach with the private sector.

There is a solution which will satisfy all parties – that is to scrap IR35, or at least apply it only to the self-employed and partnerships. I know that IPSE (formerly PCG) have consistently called for IR35 to be scrapped with no real response from different governments, but it now becomes acceptable to do so because the tax on dividend payments has been significantly increased. Once money has been paid into a limited company it can only be taken out as PAYE income or dividends, so if the Treasury is getting their fair share of tax either way, IR35 becomes unnecessary. This will save HMRC the time and cost of conducting investigations and hiring extra staff to do so. The contractor community will be pleased to be freed from uncertainty about their potential tax liability and whether each assignment they undertake will fall ‘in’ or ‘out.’

I urge anyone affected – freelance contractors, employers and recruitment companies – to spare a few minutes today to tell the taxman how damaging his proposals are going to be for you and your business. If you miss today’s deadline to respond to the consultation, all is not lost. You can still write to your local MP and of course Philip Hammond, the new chancellor, pointing out the unworkable and unreasonable nature of this unwieldy plan to change IR35, its inevitably negative impact on the freelance community and the fact that it will ultimately cost the taxpayer – and our economy - more.  

Editor’s Note: Related Reading –

Now’s the time to fight HMRC’s worrying IR35 proposals

What’s wrong with the Budget’s PSC tax clampdown

Contractors’ Questions: How to prepare for April’s IR35 changes?

Contractors’ Questions: What will public PSCs do about IR35 from April?

Contractors’ Questions: Will being inside IR35 trump using a brolly?