Prepare for IR35 crackdown ‘immediately’, experts urge

Extension of rules to private sector will require huge planning, amid fears of shrinking talent pools and legal challenges

IR35 rules governing ‘off-payroll’ working will be extended to the private sector from April 2020, the chancellor announced in yesterday’s budget, sparking warnings that businesses must begin preparing immediately for a huge change to how they pay contractors and freelance workers. 

The IR35 regime was introduced to the public sector in 2017, and has meant employers are responsible for deciding whether to deduct tax and national insurance (NI) from workers, as well as making employer national insurance contributions.

Philip Hammond has now extended the rules to private sector workers, with immediate ramifications for those contracted through personal service companies (PSCs) and other contingent individuals. He said the move would be restricted to medium-sized and large businesses, but no immediate guidance was offered on exactly which organisations would be affected.

While the rules aim to equalise the amount of tax paid by contractors and permanent employees – which the Treasury claims could reach £1.3bn annually by 2023 – critics have claimed they hurt individuals who are effectively taxed as full-time staff but who lack employment rights such as sick pay or holiday. 

Bodies representing contractors reacted to the move with fury. Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), said: “The chancellor’s smash-and-grab approach to taxing the smallest businesses is short-termism on steroids. It is a short-term tax grab that will do lasting damage to the economy by taxing out of existence the smallest and most agile businesses.”

Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA), previously predicted 5.5m businesses would be affected if the rules extended to the private sector. 

Research by consultancy Contractor Calculator previously suggested the overwhelming majority (98 per cent) of independent contractors would avoid working on contracts that placed them inside the IR35 if the tax reform was enacted in the private sector. 

Contractor Calculator predicted the private sector would face rising costs, shrinking talent pools, reduced flexibility and legal challenges to status assessments under IR35.

But the practical implications of the change will be of more immediate concern for private sector HR departments, many of whom will need to invest considerable time and effort in classifying and communicating with contingent workers. Many freelancers – effectively faced with a choice between forming their own limited company or paying additional national insurance – may ask for an uplift in their rates or request a full-time role. 

Seb Maley, CEO of Qdos Contractor, urged businesses to prepare well in advance of the “hugely short-sighted” but “manageable” changes.

He said: “For all the government’s promises to support independent workers, by announcing private sector IR35 reform this administration has shown yet again that it is more focused on squeezing the highest amount of tax out of contractors, not necessarily the right amount.”

Maley advised that medium and large businesses in the private sector get to work “immediately”.

“Given the size of the task ahead, it’s vital the businesses and intermediaries engaging contractors ensure they have the skills and expertise to make accurate IR35 assessments on a case-by-case basis well in advance of April 2020,” he said. 

Samantha Hurley, director of operations at the Association of Professional Staffing Companies (APSCo) and co-chair of HMRC’s IR35 forum, agreed, saying organisations should begin by reviewing their existing contingent workforces to determine which employment models are being deployed. 

She advised employers to engage with others in their recruitment supply chains to discuss which roles were likely to be affected, and determine if workers with those skills were thin on the ground or easily replaced. 

Hurley also recommended ensuring IT systems and internal processes were in order, to cope with the new rules. “To be forewarned is to be forearmed,” she said. 

Colin Morley, professional services director at Harvey Nash Recruitment Solutions, said businesses and contractors across the UK could breathe a sigh of relief, “but not for very long”.

He said: “The government's decision to delay the introduction of the new IR35 rules to the private sector until 2020 shows that they've listened to the warnings of experts and industry leaders. IR35, in its current state, will hurt innovation, productivity and ultimately the economy. 

“We hope HMRC will take this period to reflect upon the deeply flawed regulation and make the necessary adjustments to support, not hinder, the UK's business and contractor communities.”

Experts had previously urged the government to hold off on expanding IR35 until at least 2019. Recruitment and Employment Confederation (REC) chief executive Neil Carberry said: “[The] delay must now be used as an opportunity to get any future reform right, not just a delay.  Now is a good time to pause for thought.”