The government will officially extend IR35 tax rules to the private sector during its Budget announcement later this month, it has been claimed, with experts warning of increased practical and financial burdens on HR departments as a result.
The BBC reported yesterday that chancellor Philip Hammond planned to extend IR35, which has covered contractors in the public sector since 2016, to the private sector in his Budget on 29 October.
The move had been widely anticipated, with the government closing a consultation on the potential extension in August. Under IR35, the responsibility for determining tax status of ‘off payroll’ workers falls on the hiring organisation; in the public sector, this has meant large numbers of freelancers and contractors have been required to have national insurance deducted through PAYE, with employers also making national insurance contributions when hiring them.
The BBC cited Treasury figures suggesting a third of workers using personal service companies to bill businesses should in fact be classified as employees. It claimed the missed tax take from failing to reform the system could reach £1.3bn annually by 2023.
John Chaplin, partner at EY, said he anticipated Hammond would announce the move this month, with the main question being when exactly the reforms would be introduced.
“The safe money is on it being April 2020. April 2019 is feasible but would allow businesses little time to deal with the changes and may lead to them rushing through measures,” he said.
“It is hoped HMRC will not rush any implementation but will instead allow enough time and provide better guidance and support.”
Christian Verri, employment tax director at PwC, speculated that the government might announce measures to extend some employment rights to contractors, potentially ending a discrepancy that sees some individuals missing out on legal employment status but still required to pay employee taxes.
“It is entirely possible that the government may introduce further reform such that contractors caught by IR35 will get some level of increased employment rights,” he said. “This will put further burden on HR departments who potentially will have a whole new contingent of the workforce they will need to monitor for these purposes, where historically they wouldn’t have fallen within HR’s responsibility.”
Verri warned that any IR35 reform would have administrative and practical implications for private sector businesses.
“Companies will need to decide where those assessments are carried out – by HR, the tax department, or locally within the business,” he said.
“These reforms will place a considerable burden on business, both in terms of designing processes to make the assessments and then further changes to systems, etc. to move contractors onto payroll where required,” Verri added. “There will also be an immediate cost increase in terms of employers’ national insurance.”
Meanwhile, organisations representing the self-employed reacted angrily to news of the potential IR35 extension.
“The government is loading the gun against the self-employed,” said Andy Chamberlain, director of the Association of Independent Professionals and the Self Employed (IPSE), describing IR35 as a “myopic policy” and “a short-sighted tax grab that will cause untold economic damage in the long term.”
Tania Bowers, general counsel at the Association of Professional Staffing Companies (APSCo), said the Check Employment Status for Tax (CEST) online tool businesses were asked to use was “inaccurate and not fit for purpose.”
“We at APSCo maintain it is crucial that implementation is delayed for at least 12 months after the publication of the final legislation so the ‘success’ of the public sector rollout can be assessed and businesses have enough time to react to the changes,” she added.
A majority of contractors have threatened to shun work that would place them under IR35 if the tax rules are introduced to the private sector.