Changes to the IR35 regulations have already cut the pay of numerous contractors, with many deciding to avoid working in the public sector.
The changes to IR35 came into force in April 2017. They result in public sector contractors being taxed directly for more assignments.
Responsibility now on hiring organisation
The new changes see the responsibility for establishing whether the IR35 rules apply to each assignment moving to the public sector organisation hiring them. This has led to more organisations becoming reluctant to classify workers as external contractors. If the organisation determines that IR35 applies to the assignment, they must deduct tax and NICs from contractors’ pay at source, rather than allowing them to defer and claim expenses. The reforms affect central and local government, the armed forces, the police, the NHS and Transport for London, among others. HMRC maintains that workers are only required to pay tax that’s due.
IR35 introduced to stop abuse
The IR35 rules came into force with the Finance Act 2000 with the aim of preventing contractors from avoiding paying their dues by drawing a tax-free salary from a company structure which they had created for that precise purpose. According to HMRC, someone earning £100,000 over the period of a year would on average pay around £34,000 in employment taxes. By not complying with IR35, that person could create a structure where they only pay £13,000.
IR35 in the private sector by spring 2018?
Many industry experts believe that these changes to the public sector are merely a dry run for a far greater, more lucrative target for the government; ie. the private sector. The consensus is that private sector IR35 changes are imminent. Most expect to see the amendments rolled out within two years. Only the ongoing post-Brexit uncertainty and the current fragile position of the government lessens the likelihood of the date of implementation going beyond 2019. Some believe the starting date could even be as early as 2018.
The official government line, however, is that there are no plans for IR35 changes to the private sector; but it does admit that all tax issues are under review. After all, the government made it clear in the spring Budget that it wants all workers to pay broadly the same percentage of tax. A different tax system for public and private sectors causes more of a headache.
Government set for backlash
To say the prospect of tax changes to the private sector is unpopular is an understatement. PRISM is the trade body representing umbrella companies. Its CEO, Crawford Temple, believes that an extension would be “a complete disaster”. As EU exit negotiations begin, the UK’s attractiveness as a business location is crucial. Extending the tax changes to the private sector could seriously undermine this.