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Contractors threaten to revolt over private sector IR35 rules

5 Jul 2018 By Lauren Brown

Freelancers say they will shun contracts and consider legal action as off-payroll changes draw nearer

The overwhelming majority of independent contractors say they will avoid working on contracts that place them inside the IR35 rules if, as expected, the tax reform is enacted in the private sector.

Research by consultancy Contractor Calculator, which surveyed 2,000 contractors and freelancers, found that 98 per cent would actively turn down work that could lead to them being paid through PAYE. 

A quarter (25 per cent) said they would never take any contract that made them liable for tax under IR35. The research also revealed that 89 per cent would consider legal action to ‘secure their rights’ under a private sector IR35 regime, while almost half (48 per cent) said they would not vote for an MP that supported the tax reforms.  

Since April 2017, a change to the enforcement of IR35 rules has meant that public sector organisations taking on workers through a personal service company have had to judge whether to deduct tax and national insurance payments.

This has led to a drop in the value and availability of public sector contracts, according to experts. An extension of the rules into the private sector had long been rumoured, and in May the government opened a consultation that is widely expected to lead to a broader IR35 regime.

This has caused concern among HR professionals who fear increased administration around the application of the rules, as well as talent shortages or increased costs if contractors do choose to shun work.  

Contractor Calculator says the private sector will face rising costs, shrinking talent pools, reduced flexibility and legal challenges to status assessments under IR35, though it is not clear how contractors would practically avoid all work under the new rules.

Chris Brazier, senior associate at BP Collins, said the results of the survey came as no surprise. He said: “The majority of contractors I have acted for have indicated that they would step away from contracts where IR35 applied and this does not seem to be an empty threat. Simply put, there is no benefit to being a contractor if IR35 applies, as they are treated like an employee without any of the protection that goes with it.”

IPSE’s policy development manager, Jordan Marshall, agreed that the 2017 changes to the IR35 rules had been viewed as bad news for many contractors. 

“The evidence from the public sector clearly demonstrates that contractors are leaving as a result of the nightmarish changes to IR35,” he said. “This has led to a situation whereby contractors are unfairly having to pay employment taxes, despite getting no employment rights.

“If the same changes are implemented in the private sector, we are likely to see similar scenes.”

A survey conducted by IPSE and the CIPD found that 71 per cent of public sector hiring managers were struggling to hold on to their contractors as a result of the changes. 

Those contractors deemed to be ‘inside’ IR35 are taxed in the same way as employees, even though they may not be eligible for typical employment rights, such as holiday and sick pay. This has led to claims of unfairness – although, for its part, HMRC says the IR35 regime is about ensuring the same tax is paid by individuals who effectively perform the same roles. 

Julia Kermode, chief executive of the Freelancer and Contractor Services Association (FCSA), said HR departments needed to factor in the IR35 changes sooner rather than later, by educating themselves about the rules and considering external support to help navigate the process.  

“The earlier you start to prepare for a likely roll-out the better, because every contractor’s individual circumstances should be considered on a case-by-case basis when it comes to IR35,” she said.

“At FCSA, we are very worried that hirers will simply not engage freelancers and contractors at all, which will defeat the whole purpose of a flexible freelance workforce that is enabling businesses to be agile. 

“In fact, this very same workforce has been widely credited with enabling the UK’s economic recovery so far, so it is unthinkable that the government might be prepared to jeopardise this with an ill-thought-through move to roll out the reforms.”

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