Why IR35's next critic should be you

The last chance for contractors to object directly to the taxman about his already much-criticised IR35 proposals for the public sector has passed, but your local MP is waiting to hear from you, writes Andy Chamberlain, deputy director of policy at IPSE.

Before detailing how to contact your MP and what to potentially say about these unhelpful proposals for public sector contracting, here’s four things that WILL happen if they take effect:

1. Contractors working on public sector engagements will no longer be responsible for assessing their own IR35 status. The responsibility will move to the public sector end-client, or - if there is an agency in the chain – to the agency.

2. If the client or agency decide IR35 does apply, tax will be deducted before payment to the contractor is made – as it is for employees. This means the client will pay Employer’s National Insurance contributions (NI), and the contractor will pay Employee’s NI, as well as PAYE.

3. Contractor businesses used to paying tax after the financial year has ended will now have to pay tax before money is received, which can result in cash flow issues.

4. Employment rights will not apply, even where contractor businesses are paying tax like employees. So contractors will still not receive pension entitlements, holiday pay, sick pay etc., even though they are paying tax in a very similar way to employees who continue to get those benefits.

The shift in liability (Point 1, above) is a major concern for contractors. This is because clients and agencies will not want to risk getting an IR35 decision wrong. And, because IR35 is so complicated, being certain that an IR35 decision is right is virtually impossible. Hirers will therefore say ‘I don’t know whether this engagement is caught or not, it’s too complicated for me to understand.’ So they’re simply going to say as a blanket rule that IR35 applies to all engagements, as that way they can’t be made liable for anything further down the line.

We were interested to know how contractors would react to these new rules, should they be implemented, so we launched a survey. The results are staggering. More than half said they would leave the public sector. A further four in ten said they would increase their day rates to offset any additional tax liability. Less than two per cent (yes, just two!) said they would accept the new rules.

This tells us if the new rules come in, public sector organisations will be unable to attract the talent they need or will have to pay more to get it. Either way, public services will be hit. That means a less efficient NHS; a skills gap at the heart of our defence policy; (even more) delays and soaring costs in delivering major infrastructure projects. The list goes on.

In short the proposal will do significant damage, for very little gain. The government anticipates this will raise £265million in the first year and just £65million the year after – these are small amounts in the context of overall revenues – and we believe it will cost far more than that to implement this ill thought-out measure.

IPSE has responded to HMRC’s consultation on this issue. Our chief executive has even met with the prime minister. And we’ve held roundtables with stakeholders, members and HMRC. Throughout it all, our message has and will continue to be clear - we want the government to abandon the proposal. Our campaign will not be ending anytime soon. We will continue to fight - and we need the help of the entire contracting community.

We urge you to write to your MP and explain how this proposal will damage your business. Make sure you spell out:

• how the proposed change will affect your business
• how will it affect the projects you work on (and what those projects are)
• what steps you will take if the proposal is implemented (will you stop working for public sector clients; put up your day rate; or stop contracting altogether?)
• how you will be denied employment rights, despite paying employment taxes
• what you want the MP to do (e.g. urge the chancellor to reconsider at Autumn Statement 2016).

It’s really important that individual contractors make their voices heard. We need to get MPs and ministers worried about the negative impact this proposal will have on your businesses and the public sector itself. If we all don’t take a stand against this plan, who will?