Contractors demand greater employment rights after IR35 switch

New public sector tax rules mean freelancers ‘want something in return’, says survey

The majority of workers operating through private service companies (PSCs) would like employment rights such as paid holiday and pension contributions when working inside the IR35 tax rules

According to a new survey of 1,500 freelancers and contractors by Qdos Contractor, 89 per cent would like to be offered employment rights when working inside the IR35 off-payroll rules. Half want paid holiday, 23 per cent are looking for pension contributions and 14 per cent expect paid sick leave.

Despite many contractors valuing their independence, the government’s transfer in April 2017 of the power to determine IR35 ‘off payroll’ status from workers to the end engager organisation in the public sector has seen many contractors realise they are missing out on employment rights.

“Given contractors working under IR35 are effectively required to pay the same taxes as employees [but without their employment rights], independent workers are quite rightly calling for something in return,” said Seb Maley, Qdos Contractor CEO.

“The government simply cannot expect contractors to accept such fundamental changes to the IR35 without offering employment rights.”

Chris Brazier, employment lawyer at B P Collins, said the benefit of working through a PSC is that individuals pay themselves in dividends. As such, they do not pay income tax or employee national insurance contributions (NICs). 

The new public sector IR35 rules, however, prevent that from happening by requiring the intermediary to arrange the ‘income’ payment subject to tax and NICs, in cases where the individual falls within the new IR35 off-payroll rules.  

“In these circumstances, much of the benefit of operating through a PSC is lost to the individual, with none of the protection that employees and workers enjoy.” 

As such, the results of the survey from the perspective of contractors are unsurprising, said Brazier. “However, from an employer’s perspective, the ‘contractor’ is not included in headcount and they do not need to be concerned about employment status. This has advantageous tax implications for the organisation.

“Accordingly, if individuals were given employment – or more likely worker – rights, one of the main incentives for engaging individuals through PSCs, even those caught by IR35, would be lost to employers.”

A further issue with giving contractors employment rights is the extra cost to employers, in addition to already having to pay employers’ NICs. 

Michael Ryley, partner at Weightmans, told People Management: “Bear in mind that contractors are often taken on to circumvent headcount restrictions – the option of employment may simply not be available.”

The erosion of tax benefits under the IR35 since the change came in has seen 70 per cent of recruiters reporting that the number of public sector contractor placements has fallen, according to reports. The government is consulting on whether the legislation may also be applied to those operating in the private sector, adding to some concerns about how employers will interpret the IR35 rules.

There are already several high-profile HMRC investigations and cases surrounding the status of IR35 workers, highlighting the potential pitfalls faced by end engagers and contractors. 

Former BBC presenter Christa Ackroyd was deemed to be within the IR35 tax rules after she was found to have been an BBC employee, not a contractor, and was ordered to pay more than £400,000 in unpaid tax to HMRC. This demonstrated the importance of correctly identifying the status of the contractor. 

“Employers need to make sure that the status of the individual is clear – if there is doubt then the employer may be exposed to employment liabilities that it never realised it had; for example, a claim of unfair dismissal could be made against them and they could be exposed to a tax risk,” said Ryley.

Brazier added that HMRC had significantly clamped down on individuals who were found to be working within the IR35 rules despite their organisation denying this. 

“As such, employers should ensure that their contractual documentation and the relationship that sits behind that contract with any PSC is regularly reviewed and assessed,” Brazier said. 

He suggested that employers ensure they have carefully drafted documents that reflect the reality of the contract in place. 

Brazier said these should include: a right of substitution, so there is no obligation to accept and no requirement to provide work; the employer/company should have as little control as possible over the PSC; the contract – or, if possible, the ‘project’ – should have defined end dates; and the individual engaged by the PSC should not be fully integrated into the employer/company.

“If employers actively follow these contractual principles, they will be significantly reducing the risk of an investigation by HMRC.

“The trade-off is that the employer will have less control over the work of their contractors and, if they cannot sacrifice that control, alternative options should be considered.”