IR35: what private PSCs could see in April 2019

While some people talk about fairness and parity between freelancers and the employed, I doubt the government is looking at changing the IR35 legislation because they feel a moral obligation to create greater fairness, writes Mark Lee, founder of ContractElite.

The government needs to collect more tax; that’s the real incentive. As chancellor Philip Hammond has already flagged up (and quite nicely, given that his Spring Statement 2018 is just around the corner), the greater propensity for individuals to contract/freelance rather than take on permanent roles inevitably means potential tax receipts per head reduce. If his Treasury’s projections are to be believed, this reduction rate will only increase in the coming years.

If I were a betting man, here’s what I’d put a few Bitcoin on:

1. An IR35 legislative change in the private sector will happen. It seems unlikely the government will take the risk of further movement from permanent employment to contracting and the resulting potential tax losses per head without protecting its revenue. April 2019 is still the consensus view of its commencement.

2. Ahead of the change, some companies will start insisting on contractors using umbrellas -- because it’s the easy decision to make. It takes less effort to pass potential risk to someone else and pay for the protection than to figure out whether you actually have any risk.

3. Confident companies will engage directly. IR35 is designed to counteract disguised employment and tax evasion. Companies with a clear engagement strategy in respect of genuine contractors won’t need to mitigate risk they know they don’t have.

4. Some contractors will turn away from self-employment. Either because they fear the IR35 uncertainty and risk, because the benefits of it will be perceived to be outweighed by the downsides or because genuine disguised employment is being eradicated. There is some evidence of this already happening.

5. Contractors will increase their day rates. Umbrellas will lower take-home pay, so the natural reaction will be to increase day rates to maintain net income levels.

6. Companies will be happy to pay more – if the increase is reasonable. Companies value contractors because they create fiscal flexibility. The biggest cost for virtually all companies is people. So, if a significant proportion of your costs can be easily reduced (at no cost) by cancelling service providers contracts during difficult trading periods, this flexibility is worth paying for.

7. Contractors will start to act less like employees and more like service providers. It will be difficult to defend an IR35 disguised employment claim if a contractor looks and acts like a B2B service provider with service features; benefits and output-based engagements agreed.

My closing thoughts before the government consults

The flexibility and skills provided by the UK’s contracting and interim workforce is essential to the future economic growth of this country. In my experience, contractors are skilled, experienced, confident, optimistic, passionate and have a thirst to develop both themselves and the companies they engage with.

Contractors often form a disproportionate percentage of start-up businesses; the essential nursery for the great UK companies of the future. They are also essential for delivery of infrastructure development and change programmes. Wherever you need change, transformation, innovation, development and to challenge the status quo, you’ll often find a wealth of expertise provided by contractors and interims. Let’s hope the government takes a balanced view in what it does next -- a post-Brexit Britain is likely to need all the economic tail winds it can get.