The Treasury has dropped its strongest hint yet that IR35 rules governing how freelancers and contractors are taxed could soon be extended to cover the private sector.
With an autumn budget looming, the financial secretary to the Treasury, Mel Stride, told the Financial Times that his department was considering reforms, adding: It is not just the issue of tax that we might not be collecting that we should be collecting, it is also an issue of fairness between the public and private sector.
He declined to outline specific plans to extend the reforms to the private sector, or to confirm whether they would form part of the budget, but did suggest that the government would not be unduly deterred by opposition from employers.
The reformed IR35 rules, which came into effect on 6 April, mean public sector employers are required to deduct tax and national insurance contributions from contractors’ pay at source, rather than allowing them to defer and claim expenses.
Stride said efforts to improve compliance in the public sector since the reforms were enacted appeared to have had a significant impact, with 90,000 additional workers being taxed as employees in the first three months. The public sector has undergone a behavioural change, which means we are seeing far fewer [workers] offer their services through service companies, and yet the private sector is able to carry on with that behaviour unchecked, he said.
Extending IR35 into the private sector would remove the disparity between the sectors that some public sector employers feel is unfair. But it could also see a repeat of the confusion that has characterised the rules’ introduction. A poll found that 45 per cent of recruiters had seen evidence of contractors increasing their rates under IR35, while two unions are bringing a case on behalf of locum doctors and healthcare workers, arguing they have been unfairly treated by the NHS blanket application of the IR35 rules.
For its part, HMRC has argued that the regulations are designed simply to ensure that relationships “mirroring” the employer-employee relationship are taxed accordingly. In a People Management blog, it said it had shifted the responsibility for making IR35 decisions from contractors to employers, and said 90 per cent of contractors had previously classified themselves wrongly.
Samantha Hurley, director of operations at the Association of Professional Staffing Companies, believes there is “no doubt” an extension of the regulations into the private sector will have a significant impact on the dynamics of the labour market for flexible workers. She said: “Flexibility is key to the competitiveness and the future growth of our economy. Self-employed contractors are a vital resource, and to undermine this sector would cause significant damage at a point of uncertainty and instability.
We believe a move to change legislation on off-payroll in the private sector at this time is ill-conceived, and for the government to take this step would be immensely damaging to the flexible labour market and economy.
Kate Cottrell, managing director of consultancy Bauer & Cottrell, added: “[The Treasury] is obviously gearing up to do it.” But she warned that such a move would cause “massive issues”.
Mark Groom, partner at Deloitte, said the Treasury might launch a consultation on the matter in the budget, but he did not expect it to implement any new measures until April 2020.
This is by no means the first time speculation has emerged about IR35 being extended into the private sector. Recruiters told People Management in July that it could happen “as early as spring 2018, and the prospect was found to top contractors’ list of concerns in a survey by Qdos Contractor.
A spokesperson for the Treasury said it could not “speculate on tax policy ahead of fiscal events.