The government has launched a consultation on the extension of IR35 tax rules to the private sector, sparking an influx of criticism of what campaign groups have described as “suffocating” reforms.
Under the government’s planned reforms, private sector employers of contractors will be responsible for deciding whether to deduct tax and national insurance (NI) from them via payroll from April 2020.
The off-payroll working rules were introduced to the public sector in 2017 as a means of combating tax avoidance by workers supplying their services through an intermediary, such as a limited company, when they might otherwise be classed as an employee.
But since its implementation, critics have slammed IR35 for effectively taxing contractors as full-time staff but denying them employment rights such as sick pay or holiday.
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Freelancer campaign group IPSE’s deputy director of policy Andy Chamberlain said the decision to push ahead with the private sector legislation, initially announced by Chancellor Philip Hammond last October, was “astonishingly myopic.”
“This proposal will hamstring freelancers and their clients when the country needs them most,” he said. “HMRC has claimed pushing these changes into the public sector generated £550 million, but this is at the cost of far-reaching and serious long-term damage. In the NHS, Transport for London (TfL) and right across the public sector, the changes led to mass contractor walkouts, causing disruption, staff shortages and even the cancellation of major projects.”
Last year, research by consultancy Contractor Calculator found that 98 per cent of contractors would actively turn down work that could lead to them being paid through PAYE. A quarter (25 per cent) stated they would never take any contract that made them liable for tax under IR35.
Chamberlain continued: “Brexit uncertainty has already driven freelancers’ confidence to an all-time low. The last thing they need now is heavy-handed legislation suffocating their sector.”
Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA), previously predicted 5.5m businesses would be affected by the reforms.
And Tim Stovold, head of tax at Kingston Smith, said it was concerning that the government was continuing the process when it was still unclear how self employment was defined.
Tom Hadley, REC director of policy and campaigns, said the clock was ticking on getting the rules around IR35 right.
He added: “Unfortunately, we have waited longer than anticipated for today’s guidance. This means that the government’s timeline doesn’t leave businesses the recommended 18 months to prepare for the new rules and REC members are telling us that their clients are largely still unaware of the changes. These changes will not be easy to implement by April 2020. The stakes are high at this difficult time for the economy.”
HMRC has previously said the IR35 reforms were about ensuring the same tax was paid by individuals who were effectively performing the same roles.
Separately, thousands of contractors who were paid via “disguised remuneration schemes” over the past 20 years are facing huge bills in April, as HMRC presses ahead with plans to recover unpaid tax dating back up to two decades.
The individuals involved – many of them pilots, nurses and IT contractors – were paid via loans but now face bills under the “loan charge” initiative. HMRC says the loans were designed to avoid tax and national insurance, but campaign groups say mass bankruptcies will result from the clampdown.
The IR35 consultation is due to close on 28 May.