Could treasury extend IR35 reforms to private sector?
Reforms to ‘disguised employment’ IR35 rules were introduced in the public sector this year. The new rules caused confusion amongst recruiters and lead to a take-home pay cut for many contractors.
Now the Treasury has dropped its strongest hint yet that similar reforms could be introduced in the private sector – with the potential to affect millions of contractors and freelancers.
In an interview with the Financial Times this week, Mel Stride, the Financial Secretary to the Treasury said: “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.”
Mr Stride said that the public sector reforms had been successful and that his department was considering reforms in the private sector, although he declined to outline specific plans or say whether they would be a part of the upcoming budget.
The reforms introduced in April mean that contractors engaged in the public sector find it harder to operate through a personal service companies (PSCs).
Instead of judging their own ‘IR35 status,’ the public sector employer is responsible for judging it on the contractor’s behalf. If a contractor is judged to be ‘inside IR35’ or in ‘disguised employment’ then the employer will be obliged to withdraw tax and National Insurance contributions as if they were an employee of the organisation.
But introducing these reforms had some unintended consequences that could be mirrored in the private sector.
In a poll of recruiters by the Association of Professional Staffing Companies (ASPSCo) 70% of respondents said that contract placements in the public sector had dropped.
Almost half (45%) said that they had seen contractors increasing their costs and of these, 46% said that the rate rises were over 15%.
Asked about the possibility of the IR35 changes being extended to the private sector, a whopping 78% of the professional recruiters said that it would impact the UK economy’s ability to source flexible labour.
In a letter to Chancellor of the Exchequer Phillip Hammond, IPSE Chief Executive Chris Bryce warned that changes would unfairly punish one of the most productive sectors of the workforce. And that it would impair the flexibility of the labour market and not effectively tackle disguised employment.
He said: “For some time, IPSE warned of the damage the changes to IR35 would do in the public sector. Six months on, we have been proved right. Already, for example, there has been a mass flight of freelancers from the NHS, and numerous TfL projects have stalled because contractors are leaving in response to heavy-handed, blanket inside-IR35 judgements.”
Umbrella Director Miles Grady said: “It is unfair that public sector organisations have to look harder and pay more to get top quality contractors, but the Treasury was warned about that outcome long before it introduced these reforms. To say now that these reforms have to be extended is like saying that the government needs to shoot itself in the left foot because the right has already got a hole in it.
“Contractors and other flexible workers are critical to the success of the UK economy. If the Treasury wants to ensure parity between the public and private sectors in a constructive way then they should scrap the April public sector changes.
In my opinion all contractors should be taxed in a way that recognises the entrepreneurial spirit in which they operate. In addition many contractors travel huge distances to fill important assignments but get no tax relief for the travelling costs incurred. However, employed workers who are assigned by their employer to a different, temporary workplace are. This clearly isn’t fair.”