Government to forge ahead with IR35 reforms affecting 170,000 contractors
IR35 to be expanded to the private sector - legislation included in draft Finance Bill
The government is to forge ahead with plans to extend IR35 tax regulations into the private sector, affecting around 170,000 contractors. The plans were revealed in the draft Finance Bill, published today.
The regulatory change will shift responsibility for determining a contractor's IR35 to the organisation employing the contractor, regardless of whether they are supplying their services directly (and paying themselves via a personal services company) or via an agency.
"This measure will apply to engagements with medium or large-sized organisations in the private and third sectors," declared HMRC in a policy paper updated today.
It continued: "It will shift responsibility for operating the off-payroll working rules from the individual's PSC, to the organisation or business that the individual is supplying their services to. This includes responsibility for deciding whether the rules should apply and deducting the associated employment taxes and National Insurance contributions.
"Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses."
The move will mean that around 170,000 contractors in the private sector will be taxed as if they are directly employed.
The policy paper continued: "The off-payroll working rules are designed to ensure fairness between individuals working in a similar way. To increase compliance with the existing off-payroll working rules in the private and third sectors, medium and large engagers will become responsible for assessing an individual's employment status and deducting the right tax and National Insurance contributions."
However, contractors argue that, despite being pushed to pay the same rate of tax, they won't enjoy the same level of benefits, such as paid holidays or redundancy pay. In response, they say, contractors will either expect to be paid more to compensate, or will move abroad, given the buoyant labour market for IT skills.
They point to the effect when the new IR35 rules were introduced in the public sector, with claims that four-fifths of IT projects were delayed as a result, as contractors quit to work elsewhere.
"HMRC is wrongly under the impression that public sector reform has been a success," said Seb Maley, CEO of specialist tax consultancy Qdos.
He continued: "It's no surprise that private sector changes look like they will closely mirror those introduced in the public sector in 2017, barring a few small tweaks, such as the ‘status determination statement', which means clients must respond to a contractor's dispute within 45 days. Given that liability can transfer to the end-client, this highlights the importance of making well-informed IR35 decisions.
"The onus is now on the private sector to get ready for the arrival of these changes next April. With greater clarity over the incoming rules, private sector firms can at least focus fully on preparing for these changes, ensuring they are capable of accurately setting the tax status of contractors."
"Recruitment agencies, that will often carry the IR35 liability as the fee-payer in the supply chain, must also get to work. To be in a position to continue attracting contractors and protect their own liability, it's vital they collaborate with end-clients to ensure IR35 status is set accurately."