HMRC’s crackdown on contractors is set to continue in April 2020 with new IR35 (off-payroll) rules scheduled to come into effect which will penalise ‘medium and large companies’ engaging contractors, rather than contractors themselves, for incorrect employment ‘status determination’.
As things stand, the onus is on contractors to correctly determine their status and HMRC has historically been sympathetic to the plight of off-payroll workers, hence the reduced rates of tax they tend to pay.
The unspoken agreement being that, by remaining off payroll, contractors forfeit certain rights and benefits that payroll employees enjoy but are compensated by more favourable tax treatment.
The reforms will mean that private companies (excluding ‘small companies’ – see below for definition), along with recruitment agencies, could face tax bills of hundreds of thousands of pounds for incorrect IR35 decisions.
Many medium and large private sector companies engage hundreds, if not thousands, of contractors so determining the status of each individual contractor would be an administrative nightmare.
As such, it’s possible that some companies will either stop engaging contractors completely or demand that they become employees to avoid any risk of being penalised by the Revenue for incorrect classifications.
This will likely have a detrimental effect on the relationships between contractors and the companies that engage them.
What constitutes a ‘small company’?
The government has stated that it intends to use ‘similar criteria’ as that found in the Companies Act 2006 to define a small business.
The Act says that a company will be regarded as small if it ticks two or more of the following boxes:
- Turnover of £10.2m or less
- £5.1m or less on its balance sheet
- 50 employees or less
In other words, a hell of a lot of companies will be affected. And it’s happening pretty soon. Here’s an excerpt from the public sector guidance, which is already in effect:
“Damaging unintended consequences”
The reforms were applied to the public sector in April 2017 and, as predicted, have caused widespread disruption. The updates to the legislation concerning off-payroll contractors working in the private sector will mirror these changes.
Considering the impact the first round of reforms has had on the public sector, many are understandably nervous about the effect this next, much more far-reaching round of reforms will have on the economy.
Indeed, Charles Cotton, senior performance and reward adviser at the CIPD (Chartered Institute of Personnel and Development), said research on the impact the IR35 updates have had on the public sector suggested the amendments had resulted in ‘damaging unintended consequences’ for the public sector.
“HR professionals have said they are finding it harder to recruit and retain skilled contractors, which is contributing to project cost rises, projects being delayed and, in some cases, projects even being cancelled,” Cotton said.
Chris Bryce, IPSE’s chief executive, said the findings were a ‘resounding retort’ to what he called HM Revenue and Customs’ (HMRC) ‘deeply flawed’ research on the tax changes’ impact on the public sector.
“Nothing short of a disaster” if changes are applied to the private sector
“[Our findings] confirm what we have been hearing anecdotally for a long time – these changes just have not worked. In fact, they’ve caused serious damage right across the public sector, stalling major [Transport for London] projects and even contributing to the NHS staffing crisis.”
Bryce said last year that it would be ‘nothing short of a disaster’ if the government went ahead with its proposals to extend IR35 changes to the private sector.
It would be interesting to compare the amount of tax HMRC has been able to successfully claw back through the reclassification of public sector contractors with the amount of money lost by, say, the NHS through inefficiency brought on by the loss of long-time contractors. It’s probably not worth checking GOV.UK for those statistics, though.
Regarding the private sector, some believe that affected companies will stop using contractors altogether and insist that those who they had previously engaged as contractors become employees. Problem is, most contractors don’t want to be employees and, when faced with an ultimatum, would likely opt to part ways with the engaging company, as so many public sector contractors have chosen to do.
One can only hope that PM Boris Johnson’s newly appointed Chancellor of the Exchequer will veto the changes in this Autumn’s Budget… Or that the government will have collapsed completely by then. Just kidding.