Chancellor Philip Hammond ended months of speculation about private sector IR35 changes in this year’s Autumn Budget speech.
The government used the Autumn Budget 2018 to announce that off-payroll working rules for the public sector will be extended to the private sector in 2020. This means that the clients contractors work for – rather than contractors themselves – will be responsible for reporting whether they fall in IR35 or not.
Although the delay has been widely seen as a relief, and only medium and large-sized clients need to comply, tax experts have called the government’s plans into question. Read some of the best responses below.
“...the Treasury has listened to the concerns of stakeholders like ourselves who have been campaigning hard and will give us time to work more with policymakers to ensure they get it right.”
Julia Kermode, Chief Executive of the The Freelancer & Contractor Services Association
Throughout 2018, there were concerns that the government could introduce IR35 reform in the private sector as early as April 2019.
Following the Budget, organisations like The Freelancer & Contractor Services Association (FCSA) and the Association of Recruitment Consultancies (ARC) have welcomed the delay. They say it should give the government time to consider the position after Brexit, as well as carry out a full assessment of employment status rules.
But questions remain. Julia Kermode from the FCSA says that businesses will still be working against the clock to get their systems ready for the change – IT development on their part is necessary to make sure contractors are taxed correctly.
Coupled with the challenge of preparing for Brexit, Kermode says that the government “claims to be supportive of businesses but they are not making things easy for them.”
Other experts have also suggested that one rule for medium sized and larger businesses and another for smaller firms will create complexity for contractors. They’ll first need to work out which category the client falls into, then consider which rules apply.
In The Guardian, Jasper Jolly reports that IR35 reform in the private sector is set to be the government’s biggest revenue raiser from the Budget 2018.
Looking into the figures released by the Treasury, the change is estimated to bring in a peak of nearly £1.2 billion in 2020-21. It drops in the years following, with an estimated low of £595 million in 2021-22 as "taxpayers shift their tax structure to mitigate tax changes".
Between 2020 and 2024, in total the reform will still bring in £3.1 billion for the Treasury.
“Forum members were of the view that CEST required some improvements to work more effectively in the larger and more diverse private sector.”
Minutes from HMRC’s IR35 Forum meeting on 30 August
While not strictly a Budget response, minutes from HMRC’s IR35 Forum meeting on 30 August were released after the Chancellor’s speech. Here, HMRC acknowledges concerns about its Check Employment Status for Tax (CEST) tool.
Both contractors and hirers in the public and private sector can use the tool to check whether off-payroll working rules apply. HMRC say they will stand by the tool’s results, unless they find that the information provided wasn’t accurate.
But the tool doesn’t currently take a key piece of case law called MOO (Mutuality of Obligation) into account, which experts argue is a big oversight.
The minutes confirm that HMRC is clarifying its position on MOO, after forum members criticised the fact that the tax body’s interpretation is different to existing case law.
What’s more, HMRC say they’re already looking at where the CEST tool ‘might be improved’, which could see it refined before private sector IR35 reform is introduced.
“This [roll out] is still premature until the full facts of the public sector impact have been established, which won’t be known until the middle of 2019.”
Dave Chaplin, Chief Executive of Contractor Calculator
Dave Chaplin has been the most outspoken and vocal critic of HMRC’s plans for IR35 reform. And despite the delay, he’s still not optimistic.
Chaplin says: “for a Government that claims to be pro-business, this extra tax will slap an additional 10% onto the cost of hiring flexible workers for growing businesses that are unable to afford full-time workers.”
He continues to suggest that the government’s made a mistake in announcing reform before they know the full impact of public sector changes. He says we can only fully assess this in mid-2019, after 2017-18 Self Assessment tax returns are in.
Although Dave Chaplin has urged contractors to keep campaigning against the changes, Helen Christopher at contractor management company Orange Genie thinks that collaborating with HMRC will now be the best use of time. She said: “The time for pondering is probably over now...what we need to do is work together”.
We initially reported on the government’s IR35 announcement in our Autumn Budget roundup.
At the end of our article, we asked our customers whether the government should reconsider its plans for IR35 reform in the private sector. The results show the government may want to give further thought to implementing and managing the reform before 2020.
“Against this backdrop [of both IR35 reform and Brexit], it is unsurprising that the total number of self-employed is falling.”
Andy Chamberlain, Deputy Director of Policy and External Affairs, IPSE (Association of Independent Professionals and the Self-Employed)
Recent figures from the Office for National Statistics have revealed a 59,000 annual fall in self-employment. This coincides with a 21,000 quarterly rise in joblessness, which IPSE feel is cause for alarm.
Speaking on behalf of the organisation, Andy Chamberlain said that government policies are to blame for the drop in self-employment – IR35 reform included: “if the self-employed are discouraged from working for themselves by ill-judged policies like IR35 and Universal Credit, it is likely to mean further rises in unemployment.”
“I’d like to remind the chancellor that it’s no mean feat to create a successful career as a contractor.”
Lee Murphy, Chief Executive of Pandle
Writing for Contractor UK, Lee Murphy says that although the Chancellor claims that ‘encouraging entrepreneurs’ should be at the heart of the UK’s strategy, the government fails to view contractors and freelancers as proper business owners.
Murphy says that contractors and freelancers offer their expertise to British businesses on a project basis, while at the same time looking after their own business without any benefits like holiday and sick pay.
With the government seeing contractors as employees for tax purposes, there’ll be an impact on take-home income – Murphy believes that even with a delay, contractors should start preparing now. Look at your own income and business and see how the changes might affect you, and research your options ahead of 2020.
What’s your response to the IR35 announcement? Let us know in the comments below.
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