New IR35 tax rules will come to the private sector

• 58% of Human Resources Directors believe the Government will extend public sector IR35 rules to the private sector
• The majority of HR experts believe private sector organisations using contractors and interims will be required to determine whether an engagement is inside or outside IR35
• 72% of HR Directors believe the introduction of this legislation would drive wage inflation, pushing pay rates up by an average of 23%  
• Advantage for overseas competitors – 35% of HR professionals think rule changes will force talent to emigrate for contracting roles

New research¹ from Green Park reveals 58% of UK based Human Resources Directors believe the Government will extend the revised public sector IR35 rules to the private sector in the next 24 months.  The change would see contractors’ tax status determined by the companies that employ them.  Those that are judged to fall inside the IR35 tax system would be treated as employees for tax purposes, with tax and national insurance contributions taken at source, rather than being administered by contractors’ Personal Service Companies (PSCs).

Almost three quarters (72%) of HR Directors believe extending this legislation in the private sector would drive wage inflation, pushing up pay rates by an average of 23%.   More than one in six (16%) of HR professionals believe the impact of wage inflation would be even more profound with average wage increases over 30%.  Given many of those who would be impacted are highly skilled contractors and interims employed for their specialist expertise, firms will face difficult decisions as to how to pay for this knowledge.

Firms would face a significant skills shortage if the legislation was brought in, as 67% of Human Resources professionals say they would have trouble recruiting contractors and interims.  It could also offer significant advantages to overseas competitors to UK based firms as highly skilled employees are driven to work abroad.  There was a feeling amongst more than a third (35%) of respondents that skilled workers would emigrate for contracting roles and 28% felt it would be more difficult to recruit overseas talent for these positions.

Raj Tulsiani, CEO of Green Park, says: “If IR35 rules are extended across the private sector it will have a negative impact for UK plc.  It would have a direct impact on the international competiveness of UK firms and their ability to be agile and innovate.  Contractors and interims bring unique skills and expertise that are often not required on a permanent basis, so any moves that would restrict access to these individuals and make them available to competitors overseas is detrimental to the UK economy.  At a time of economic uncertainty why would we reduce the competitiveness of our labour market globally?  We need an agile, mobile and highly skilled workforce where multiple firms can benefit from the unique skills of contractors working on large scale change management initiatives.”

Table One: Predicted impact if IR35 rule changes were extended from the public to private sector 

Source:  Green Park

It is anticipated that the introduction of new IR35 rules would make it difficult for UK based firms to remain agile, with more than half of HR professionals concerned about the ability of their organisation to respond rapidly to changes in the market. It is also predicted that it will have a negative impact on their ability to deliver change management (31%) and technological developments (31%).

Commentators have highlighted that IR35 rule changes in the public sector have resulted in a reduction in the available talent pool and wage inflation, both negative impacts for public sector organisations.  Green Park reports a clear upward movement on rate requirements from candidates when pricing new public sector assignments, as well as for those with ongoing assignments that fall inside IR35, of up to 25-30%.  If the same impact was replicated in the private sector, the costs of managing sophisticated IT, engineering and change management projects will increase exponentially decreasing the competitiveness of UK companies, impacting not just their profitability but crucially their viability.

¹ Research amongst a sample of 53 UK based Global Human Resources Directors of companies with <1,500 employees between 3^rd – 14^th July 2017.