Today’s the day IR35 changes – for good or bad

April 6, 2017
by John Websell

UK contractors are no doubt intimately aware that the proposed changes to IR35 come into effect today.

It’s difficult to provide a comprehensive description of the exact nature of the amendments – due in no small part to the complexities of the legislation itself – but, simply put, for those who fall within the expanded terms of IR35, tax and insurance contributions will now be calculated and collected directly from source, rather than allowing the contractors themselves to calculate their own obligations.

Yet, despite HMRC’s claims that the modified legislation will enable the government to bring in an additional £400 million each year (the annual amount lost due to incorrect tax and NI calculations) many are apprehensive, fearing the changes will cause far more harm than good for individual employees and recruitment agencies alike, especially in the public sector.

What it means for contractors and employees

Regardless of whether or not they fall within the expanded scope of IR35, for the majority of contractors who’d traditionally work through their own limited company, one of the major downsides is pretty straightforward: their tax contributions will rise. Primarily, this is because whereas self-employed status provides individuals with a degree of versatility when managing their tax affairs, under the new rules, companies will treat freelancers as standard employees. Many have (perhaps rightly) complained about the hypocrisy of being regarded as a regular employee in this regard, when associated benefits such as a workplace pension, protection from unfair dismissal, holiday and sick pay are withheld. Anyone who followed the Uber case from last October will remember it was the denial of these very same employment rights that led to the enquiry in the first place.

As frustrating as this is for the average contractor, information obtained by The Guardian suggests integral frontline government services could suffer as a result of the revised legislation as well. Individuals working within the NHS, local councils and police forces, for instance, could see their net pay decreasing by as much as 30%, according to analysts, which some fear could lead to a mass exodus of workers in the public sector and thus a skills shortage in these essential areas.

Meanwhile, a significant number of those who, strictly speaking, should be untouched by the changes may still find themselves adversely affected. Under the new rules, the agency not the contractor is liable if said contractor’s IR35 status is registered incorrectly; combined with the esoteric complexion of the legislation, recruiters are adopting a low-risk approach in order to remain compliant and avoid legal issues further down the line. ABRS, part of the TEC Partners Group, can personally attest to the impact this has had. Whereas some other agencies refer all their contractors to an umbrella company, we continue to judge our contractors on a case by case basis rather than playing it safe and applying IR35 across the board, thus we’ve been able to help many individuals who’ve fallen foul of the new legislation. If you are currently experiencing these challenges with your current agency and want to work with one who can support you, then please get in contact with ABRS for a confidential discussion. And even though public sector bodies are supposed to provide an initial IR35 assessment at the start of a contractor’s employment anyway, they too are following this example and are treating everyone alike as a pre-emptive measure to prevent legal problems from arising.

The lack of certainty and seemingly inconsistent stipulations has given companies within and without the public sector a serious headache. Aside from the resulting skills gap as people seek alternative forms of employment outside the constraints of IR35, assignments that are covered by the reforms have reportedly increased in price by as much as 15-20% as a consequence. Not only does this place an extra financial burden on the public sector, from a recruiter’s perspective, this makes filling affected roles far more challenging; after all, why remain a contractor when you could become a permanent employee of a firm, earning the same amount of money but with the added benefits of holiday pay, sick leave etc.?

Given the potential complications and legal issues, Contractor UK urge all freelancers (particularly those in the public sector) to update the terms of their contract as soon as possible to make sure it adheres to the revised legal parameters and they don’t receive any nasty surprised in future; alternatively, it might be necessary to create an entirely new agreement, just to be on the safe side.

The future of IR35

Taken at face value, there does appear to be some sense in today’s changes. If people have been using technicalities or legal loopholes to avoid tax in the past, it seems only right for the government to take steps to prevent this from happening in future. Besides, as an HM Treasury spokesman said in February, shouldn’t two people doing the same job should pay the same amount of tax?

That being said, it’s difficult to reconcile HMRC’s potentially valid goals with the numerous complications, problems and burdens imposed on UK employees as a result of the new system, especially when you consider retroactive charges might be imposed on any individuals and companies that have incorrectly calculated tax in previous years.

Indeed, demonstrating just how controversial IR35 really is, you need only refer to the 36,000-strong online petition opposing the changes. However, as large as this figure seems, it’s still well below the 100,000 signatures required to re-open the debate on the subject; in other words, like it or not, we’ve all got to accept the legislation for now at least.

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