IR35 - A Public and Private Issue

No doubt there were a few sighs of relief last year when the Chancellor of the Exchequer confirmed a delay in the introduction of IR35 changes to the private sector.

Only applying to large and medium-sized organisations and not until April 2020, the extra year could be crucial in the successful implementation of these ‘off-payroll’ rules, which aim to curb tax avoidance and had a messy introduction to the public sector in April 2017.

Contracting services firm Qdos Contractor warned “Reform – should it mirror the public sector – has the potential to impact the entire UK economy. Amid Brexit uncertainty, independent contractors and the flexible labour market are essential to the competitive economy we need.”

The private sector has been rightly cautious of the potential reform, since the Government launched their consultation in May of last year. With HMRC stating that the new IR35 rules were its ‘lead option,’ the legislative changes were widely accepted as inevitable and were expected to be enforced as early as April 2019.

With the announcement of the delay and additional time to prepare ourselves, we ask: what can we learn from the application of IR35 in the public sector? We know many contractors were wrongly placed inside IR35. HMRC recently lost a legal case where it demanded £26,000 in retrospective taxes from a public sector IT contractor it believed was covered. If IR35 is extended across the private sector we would hope for much greater clarity from HMRC to establish who falls in or out of scope.

The HMRC’s Check Employment Status Tool (CEST), used to determine if contractors are covered by IR35, has failed contactors in a multitude of ways. A biased and unjust tool is how many summarise CEST, as there are major discrepancies with how the tool determines employment status. The Government’s own “Off-payroll reform in the public sector” report highlighted mixed views on the usefulness of the CEST tool. When asked, 43% of those who had difficulties complying with the legislation attributed this to the CEST tool. Prior to IR35 being introduced to the private sector, HMRC would need to address the issues with CEST.

Further analysis of the Government’s own report reveals 47% of central bodies did not think they had enough time to prepare for the changes to off-payroll working when IR35 was introduced in the public sector. Now with an additional year before the private sector becomes subject to IR35 regulation changes, damage ought to be minimised with the existing issues being addressed and resolved prior to the roll-out. A suitable timeline needs to be drafted giving contractors, employers and the Government enough time to prepare and adjust.

Skills drain

The public sector noticed a significant reduction in the number of available contractors following the introduction of IR35, with many moving into the private sector. As it is introduced across the private sector we must recognise the risk of a skills drain among interim talent, with the possibility of contractors finding they have more to gain both financially and in terms of employee benefits by taking up permanent positions. Additionally, with Brexit already casting uncertainty for European nationals, could the new IR35 regulation push those already on the fence to seek a more amenable tax regime?

In the public sector it now costs an interim about 25% more, pound for pound, to take an assignment inside IR35 instead of outside. In addition, the cost to hire has risen and the number of interims willing to take such assignments has gone down.

Contractors and interims possess the necessary skills and knowledge to help guide businesses through Brexit and without them our economy could face significant threats. The Government must seriously contemplate the impact of a badly introduced roll out plan and decide if we can afford to mirror the issues seen in the public sector.

Phased introduction

We would like to see the extension of IR35 into the private sector delivered through a controlled introduction, which aims to boost public confidence in the legislation and HRMC’s implementation. The Government must work alongside industry and contractors to ensure that the scheme is there to work with them, not against them, and avoid risking a skills migration. Businesses must start preparing for change, but will need guidance from HMRC before significant process changes are made.

How can organisations prepare?

Even with a phased and controlled introduction, private sector organisations must learn from the public sector and prepare in advance if they are to avoid negative impacts. This means ensuring they have the right expertise in place to assess and mitigate risks in the attraction and onboarding of interim managers. Without this, organisations may find themselves unable to fulfil their business objectives or, through disorganised processes and incorrect determinations, cause unnecessary reputational damage.

At Green Park we have lived experience of navigating our public sector clients through the IR35 regulatory updates of 2017. To find out how we can help your organisation minimise the disruption of this upcoming legislative change, please contact us at 0207 399 4300.