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HMRC Consultation All But Confirms Private Sector Edge Towards IR35

A new consultation into off-payroll working launched by the HMRC last month highlighted the inevitability of IR35’s introduction into the private sector.

The government’s aim

The consultation looks at off-payroll working rules as they apply in the public sector and how they could be adapted to address compliance challenges in the private sector, “if appropriate”. The consultation ends in mid-August, just ahead of the Autumn Budget, therefore prompting many to predict the legislation hitting the private sector next year.

Why is the government so hot on this subject at the moment? Well, they claim that non-compliance costs the treasury approximately £400m, so expectations are high despite the two-year target yield of only £45m predicted by the reform.

How has public sector reform worked out?

Since April 2017, compliance with IR35 in the public sector has been the responsibility of the end client, rather than the contractor. The HMRC has deemed the rules to have been “effective in reducing non-compliance”, however, there are many notable opponents of this, for example, the FCSA, who see the increased numbers on payroll merely showing more contractors inside IR35, many of which could have been forced into false employment and wrongly taxed.

There is now a contractor shortage that has caused delayed or cancelled public projects, most publicly, the NHS and major London Underground projects, the largest amongst those that have been affected. A survey by Contractor Calculator found that the sector lost 27% of their contractor workforce since April 2017. It could, however, be said that rolling it out to the private sector would even the playing field and help the struggling public sector to hire a workforce.

Workers such as Locum nurses have seen as much as a third of their income lost due to IR35 reforms. In the private sector, the fear is that new rules would see across-the-board decisions with workers pushed into false employment arrangements. This would hit the lowest paid in the private sector the most. As well as this, non-compliance in the private sector would likely see organisations taking a competitive edge and looking to deem everyone outside of IR35, reducing their NI liability and responsibility for employment rights.

HMRC has been criticised for having an inability to identify the IR35 status and the confusion it presents to the contractor. Their CEST tool, designed to assist with this, also shows significant inconsistencies. The tool shows a self-employed outcome of around 60%, however, since last April, pressure for workers to enter direct employment has increased tenfold. Recent tribunal outcomes have also shown a different interpretation from HMRC.

What needs to happen?

The government needs to consider a thorough review of the project and the mounting evidence of the results of the first rollout. It seems that the lines between the Treasury and HMRC have been blurred somewhat and that needs to be resolved for better control.

Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed (IPSE) believes that “It’s time that the role of HMRC was clearly defined. HMRC is currently acting as rule maker, judge and police service for the tax system. Tax policymaking should rest with the Treasury where it can be properly overseen by ministers.”

Further worries are highlighted by the potential need to teach several million small private sector businesses how employment status can be determined in a matter of months. A rollout in the private sector will present a far more significant challenge concerning monitoring, as it is just too diverse and segmented to be tackled with just one sweep. It has also been said that the HMRC has millions of unanswered calls which can only increase following a private sector roll out.

It is essential that the whole supply chain is prepared however all movements are currently speculative, and delays due to political decisions are likely. The potential roll out could affect two million contractors. As always, we will look to keep you up to date with any developments.

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