Postpone IR35 private sector rollout until after 2019, government told

10 Aug 2018 By Hayley Kirton

Experts warn lessons need to be learned from public sector before any extension of the rules

Experts are calling on the government to delay a proposed extension of controversial changes to tax laws for contractors until after 2019.

The IR35 rules, which were introduced in April 2000, essentially require freelancers who work through a personal service company but are contracting with a third party to pay tax as if they were an employee. 

Previously, it was left to the individual to decide whether they fell within the regulations and needed to have their income tax and national insurance deducted at source. But, in April 2017, the rules changed so that public sector organisations hiring contractors were required to determine their tax status instead. 

The government is now considering extending the rule change into the private sector. A consultation on the issue, jointly run by HM Revenue and Customs (HMRC) and the Treasury, closes later today. The next logical opportunity the government would have to extend the rules is the start of the next tax year, April 2019. 

IR35 specialist Qdos Contractor has called on the government to take time and care if it does proceed with the private sector rollout.

“To extend reform when the dust clearly hasn’t settled on public sector changes would be short-sighted,” said Qdos Contractor CEO Seb Maley. “The government must prioritise sorting the chaos caused by public sector reform before moving onto the private sector.

“Should the government press on with changes regardless, a 2019 rollout would be premature.”

Previous research by Qdos Contractor, published last August, revealed that IR35 rules being extended to the private sector was the biggest fear for almost half (48 per cent) of contractors, placing it ahead of worries over competition for contracts, lack of support for self-employed workers and Brexit. 

Adrian Marlowe, chairman of the Association of Recruitment Consultancies, also advised against an April 2019 start date. “With uncertainty surrounding Brexit being a real and present danger, an early and insufficiently considered extension as HMRC intends may further unsettle the economy, and even be the straw that breaks the camel’s back for hirers that have the option to use or transfer workforces outside the UK,” he said.

Meanwhile, Julia Kermode, chief executive of The Freelancer & Contractor Services Association, highlighted a number of instances where figures cited in the consultation document “seem to be overinflated and appear to be used by HMRC and the Treasury to push through legislation outside of the allowable timescale”.

“The reforms [in the public sector] have not been a success and have in fact have been a driving force for significant non-compliance through ever more complex schemes,” she added.

While Matthew Brown, technical officer at the Chartered Institute of Taxation, felt the government “has to do something” to tackle private sector non-compliance, he believed a system of better record-keeping and reporting to HMRC could achieve this rather than extending the IR35 amendments into the private sector. 

But ContractorCalculator branded the consultation a “formality”, accusing HMRC and the Treasury of having already made up their minds to extend the rule change to the private sector.

“The evidence has demonstrated that HMRC is incapable of effectively implementing the unworkable legislation and that it cannot be trusted to try and roll out the same flawed tax model to 5.7m private sector businesses,” said Dave Chaplin, CEO and founder of ContractorCalculator. “If this goes ahead, it will be like pouring glue on the UK flexible workforce just as we attempt to cope with Brexit.”

Colin Morley, professional services director at Harvey Nash Recruitment Solutions, added: “Should HMRC press ahead, the only saving grace for the private sector will be the lessons learned from their public sector counterparts.”

Writing for People Management last October, Jim Harra, HMRC’s tax assurance commissioner, argued that shifting the onus to define contractors’ employment status onto public sector organisations had made the tax system fairer for all involved.

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