Industry calls on government to hold off IR35 extension until public sector impact is clear

Treasury and HMRC announce joint consultation into off-payroll working in private sector

The government has opened its consultation into off-payroll working in the private sector, just over a year after the rules were significantly overhauled for the public sector. 

The three-month consultation, run jointly by HMRC and the Treasury, aims to “make sure that people who effectively work as employees pay the right amount of tax”. This echoes the chancellor’s autumn budget red book threat to increase compliance, potentially by extending off-payroll working rules to the private sector. 

Known as IR35, these rules mean that contractors who work through their own personal service company (PSC), but are in practice employed by a third party, pay tax as employees.

Those who are contractors but would have been employees if they were engaged directly, are to pay “broadly the same income tax and national insurance contributions as if they were employed”, the government said.

In April 2017, amended off-payroll rules for contractors in the public sector were introduced, which essentially shifted the responsibility for determining whether they should be treated as an employee or self-employed for tax purposes on to the public authority hiring them. The government last week claimed the changes raised £410m in revenue through improved compliance.

The government added that it was yet to make any final decisions and would consider “alternative options for non-compliance”.

Mel Stride, Treasury financial secretary, said: “It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy. But it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services.” 

But Chris Bryce, chief executive of IPSE, which represents freelancers and other self-employed people, described the move as a “fatal blow to the UK’s flexible economy”.

“Undermining confidence in our flexible, self-employed workforce is the last thing the government should be doing at this time of great uncertainty over Brexit”, added Bryce.

He said IPSE’s research suggested that large numbers of contractors left the public sector, affecting the NHS particularly seriously, and that the government could only assess the impact after January 2019 tax returns.

Seb Maley, chief executive of Qdos Contractor, added: “Chaos and confusion continues to define public sector reform, so the government would be taking a huge risk to press on and extend changes to the private sector. Until public sector bodies prove that they can make accurate IR35 decisions on a large scale, plans for the private sector must be shelved.”

Meanwhile, Tim Stovold, tax head at Kingston Smith, said the change “risked creating an environment where businesses erring on the side of caution will cost genuine freelance contractors substantial additional amounts of tax and national insurance”.

However, a report by IFF Research carried out on behalf of HMRC, which was published the same day as the consultation announcement, suggested that amendment of the public sector rules had had “minimal impact on how public bodies recruit”. 

A series of cases have recently tested the rules. On 17 May, Ian Wells, represented by Qdos, won a first-tier tribunal case against HMRC. He provided business services through a PSC, via Capita Resourcing, to the Department for Work and Pensions (DWP) for a year. The judge found that the DWP did not have sufficient control over how he worked. The judge also disagreed with HMRC’s interpretation of mutuality of obligation.

In March, contractor Mark Daniels won a similar IR35 appeal case against HMRC, although former BBC presenter Christa Ackroyd lost her HMRC case as it was deemed that she had been employed by the broadcaster.

The consultation closes on 10 August.