Possible legal challenge on IR35 decision

1 December 2016

Following last week’s Autumn Statement the government’s position on public sector IR35 reform is clear. But Britain’s judges could block the plans if they are shown to contradict employment law.

Set to be introduced in April 2017, the public sector IR35 reforms will lead to many public sector contractors losing some of their take home pay and the changes could have some nasty unintended consequences for public services too.

The Association of Independent Professionals and the Self-Employed (IPSE) is considering whether to challenge the reforms on the grounds that taxing contractors like employees is unfair because contractors don’t have the same employment rights.

In a statement released on IPSE’s website, Chief Executive Chris Bryce said that tougher IR35 restrictions would: “create huge problems around employment rights.”

He added: “Suddenly contractors will be paying tax at the same rate and in the same way as employees, yet they will not have any of the associated employment rights. The Government believes they will accept this; I am not so sure.

“To me it seems logical that those paying employment taxes might expect employment rights and IPSE will be seeking a legal opinion on whether this point can be challenged.”

What are the IR35 changes?

From April next year, contractors that work in the public sector will no longer be responsible for determining their IR35 status. This responsibility will pass on to the public sector organisation or another ‘engager’ (such as an employment agency).

IR35 is an extra tax on any contractors which, in HMRC’s view, are not properly self-employed. It is a tax on so-called ‘disguised employment’ that brings the IR35 contractor’s tax liability into line with the tax liability of a normal employee.

What impact will IR35 changes have?

While it is difficult to be certain, it is generally understood that public sector engagers and recruitment agencies will be more likely to interpret the IR35 rules in favour of the taxman. This means that in many cases the IR35 rules will be applied incorrectly and unfairly. Contractors caught out by the IR35 rules will see their take home pay decrease.

There will be broader consequences for the public sector and public services like healthcare provision and education. IPSE research indicates that a majority of contractors will seek to increase their prices or exit the public sector altogether.

Public sector organisations may find it difficult to attract the best talent and may have to pay more in order to access it.

Chris Bryce added: “It is likely organisations will turn to the ‘big four’ consultancies to fill the void and then the costs will really soar.”

Umbrella.co.uk Director Miles Grady said: “If there is a legal case for IPSE’s challenge then we wholeheartedly support it. We believe that the reforms are misguided and will make life tougher for contractors and the public sector bodies they serve.

“Contractors and other flexible workers are crucial to the smooth running of the economy. They have next to no job security, no sick pay, no holiday pay and in many companies they play a completely different role to traditional employees. They should not be treated as the same by the tax man.”

For more information visit www.umbrella.co.uk or email team@umbrella.co.uk