• International Workplace
  • 1 May 2018

IR35 legislation will now be “forced upon” the private sector

In April 2017, despite the outcry from contractors and multiple bodies, an updated form of the IR35 regulation was introduced to the public sector. However, anecdotal evidence suggests this has had a deeply negative impact, resulting in rising costs and project delays throughout the public sector.

Originally introduced in 1999, IR35 is known as the Intermediaries Legislation and came into force in April 2000 as part of the Finance Act.

IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company. In situations where the worker would be an employee if the intermediary was not used, these workers are deemed to be ‘disguised employees’ by Her Majesty’s Revenue and Customs.

Twelve months since the revised version was introduced to the public sector, Harvey Nash Recruitment Solutions has produced a report collecting the views of more than 500 public and private sector contractors, as well as those of business leaders and hiring managers, across a significant number of industries, towards IR35.

It finds that, despite the protestations of most experts and industry representatives and countless negative reports the new IR35 has had on the public sector, it looks very likely that it will now be forced upon the private sector.

The survey has delivered an insightful snapshot of current attitudes and concerns in relation to IR35. Its findings were as followed:

80% of contractors believe the impact of IR35 on the public sector has been “very negative”.

Since April 2017, if contractors are found to fall within IR35, payments made cannot be gross and must include tax and NIC deductions, without any of the benefits associated with being an employee. The deductions can therefore amount to a significant drop in earnings. In response to this, 42% of contractors have increased rates to balance the cost of being caught within IR35 – compared to just 16% in 2017.

The issue here is that public sector authorities are struggling to budget for such a rise in cost across the board.

IR35 has created an uncertainty that hinders a contractor’s business by impeding on its financial strategy. This has led to nine out of ten people feeling stressed, worried or angry when they think about the impact of IR35 on their livelihood.

While just three out of five respondents understand the implications of IR35 on them as contractors, 53% felt it should be up to the contractor to decide if they fall within IR35.

HMRC introduced a tool to help contractors determine their IR35 status, and one year on, it is still providing a lot more questions than it does answers. One in three found the CEST tool to be “very ineffective”.

The tool has proved unreliable, often determining incorrect results. Faith in the government’s service to deliver correct results has therefore disappeared.

Harvey Nash Recruitment Solutions shared the report findings with tax consultancy and IR35 experts Bauer & Cottrell and contractor advisory and insurance provider Qdos, inviting them to share their perspective and insights into sentiment towards IR35:

Kate Cottrell, Bauer & Cottrell said:

“The evidence thus far is a million miles away from HMRC’s claims that the rules have been a resounding success. We are still waiting for HMRC to publish guidance, research and the consultation document on the proposed roll-out of the rules in the private sector.

“The public sector has been the guinea pig in this and it is time to call a halt to this experiment before considering a roll out to the private sector. It is only when we have full and accurate details of the impact and are armed with effective guidance and perhaps a status tool that works that anyone can decide if the new rules have been effective or indeed if they have resulted in more tax and NIC being paid.

“Let’s hope common sense will prevail.”

Seb Maley, CEO at Qdos Contractor commented:

“We’re one year into public sector reform and despite HMRC’s claims that it has been a success, we’re yet to see any evidence.

“If anything, chaos and disruption has defined the changes so far.

“That said, several agencies and public sector bodies are now taking the right steps to make accurate IR35 decisions, and ones not made simply to protect their own liability. Going forward, it’s vital that other public sector bodies, notably The NHS and The BBC, rethink their IR35 strategy, that is, if they have any hopes of retaining the contractors they rely on.

“If private sector reform is introduced in due course, lessons must be learned from the public sector. And while we do not believe private sector changes to be fair or necessary, the government needs to shed light on the situation.

“Contractors are vital to the economy, and contribute an estimated £119bn each year. And so, it’s imperative these workers are able to continue working without the threat of wrongly being placed inside IR35 by their clients.”

Read the full report, IR35 Sentiment Report: Impact and Opinion