‘Huge rise’ in contractors’ fees if IR35 is extended into private sector

But new rules increase fairness, say experts – with 'only one in 10 people using IR35 correctly'

Half of UK contractors have noted a drop in the number of available contracts in the 12 months since the new IR35 regulations governing employment status for tax purposes came into effect, according to a new study. 

Many contractors feel the IR35 has had a ‘very negative’ impact on the public sector, the study of public and private sector professionals from Harvey Nash Recruitment Solutions revealed. 

It surveyed more than 500 contractors, business leaders and hiring managers on how they were handling the IR35 in the public sector, their experiences to date and the impact they believe the regulations might have if introduced to the private sector.

Forty-three per cent of contractors said they have had to pay more tax in the past year. 

Nearly half (49 per cent) said they now only seek contract opportunities in the private sector. Additionally, 42 per cent of contractors reported that they increased their rates to balance the cost of ‘being caught within IR35’, compared to 16 per cent who said the same last year. 

Harvey Nash said the results suggested a “huge increase in contractors upping their fees to counter the knock to their incomes”. 

It also noted that recent research from Qdos Contractor found that a majority of contractors feared the extension of the IR35 to the private sector. 

A majority of those surveyed felt that plans to extend the IR35 into the private sector would have a negative impact on the economy (62 per cent), as well as on levels of productivity (62 per cent) and innovation (68 per cent).  

However, experts said the results indicated that the changes were working positively and were already benefiting the economy. 

The IR35 rules were first introduced in 1999. Under changes to the IR35 tax regulations that came into effect last year, organisations in the public sector that took on workers through a personal service company (PSC) or other intermediary service became responsible for deducting the proper amount of tax and national insurance contributions (NICs) from payments – where the worker would have been regarded as an employee, had they provided services directly. 

Christian Verri, director at PwC, told People Management that the IR35 was introduced to stop tax avoidance and to tackle the disparity between the amount of tax paid by people providing their services through an intermediary and those who were employed directly by a company.

“Originally, it was brought in to stop people from avoiding paying tax and NICs by doing a job that was really employment but disguising it as work through a personal service company,” he said.

If a worker provides services through a PSC, they are free to extract income through more tax-efficient forms – as opposed to a salary that would be taxed under PAYE and subject to NICs. 

Verri explained that the current regulations, introduced in April 2017, tackled widespread non-compliance with the IR35. 

“Under the old regulations, the contractor or worker had to determine if they fell under the IR35, and research estimated that only one in 10 people were using the IR35 correctly. Rules weren’t followed,” Verri said. “HMRC did not have the resources to enforce regulation across all users.

“The new regulations meant that the end user had to determine if the worker’s role could come under the IR35 and if the withholding has to apply. As such, the public sector body has to operate that holding. The new IR35 regulations were designed to increase compliance and increase taxes.”

Verri said the new IR35 regulations have also increased ‘fairness’ in the economy. “Really, the new regulations make sure that people who are employed through PSCs and other intermediaries are paying the same amount as employees.”

In February, former BBC Look North presenter Christa Ackroyd faced an unpaid tax bill of £420,000 after a tribunal ruled that she paid too little tax. Ackroyd said she was one of a number of BBC presenters and staff who were employed by the BBC through a PSC.  

The tribunal did not criticise Ackroyd for not realising that the IR35 legislation was engaged. 

“She took professional advice in relation to the contractual arrangements with the BBC, and she was encouraged by the BBC to contract through a personal service company,” it concluded.

The High Court found that Ackroyd had not been working as a contractor but rather was effectively employed by the BBC. The judge said Ackroyd was “inevitably seen as a part of the BBC… an external observer would not know the details of the hypothetical contract”.

A month after Ackroyd’s ruling, a Department for Digital, Culture, Media and Sport session examined witnesses who gave evidence that hundreds of BBC presenters and staff were ‘coerced’ into forming PSCs to gain work at the organisation, so it could treat them as freelancers for tax purposes. 

Andrew Chamberlain, deputy director of policy and external affairs at freelancers’ body IPSE, said: “By allegedly being coerced into these contracts, these individuals may have been denied employment rights, and some face liability for huge tax bills. 

“The evidence presented gives a distressing insight into the effect the protracted discussions on pay have had on staff and their families. Some have faced working without contracts and pay for extended periods, causing untold stress and financial insecurity.

“This evidence indicates that the BBC is falling well below the standards we would expect in terms of how it treats its staff. It is disappointing that BBC management are not coming in person to answer questions on their handling of these contracts.” 

HMRC is currently investigating an estimated 200 BBC presenters to establish whether they avoided tax by being paid as contractors while being employed as full-time staff.