IR35: Surely blanket bans are not the answer?

Rather than run the risk of being caught out by the extension of off-payroll working rules to the private sector, many companies have decided to move their contingent workforce towards pay-as-you-earn, regardless of their individual circumstances. Elizabeth Kent examines the arguments for doing so and the impact it could have.

While 6 April 2020 is when the IR35 tax reforms come into force, the legislation has been causing a stir in the HR and contracting worlds for months now, partly due to confused guidance from HM Revenue and Customs. Calls for the law to be reversed have fallen on deaf ears, although HM Treasury last week announced that businesses will not have to pay penalties for inaccuracies in the first year, except in cases of deliberate non-compliance.

The IR35 reforms force larger businesses to set the tax status of their freelancers, whereas previously contractors did this themselves. Contractors whose circumstances fall within the regulation will have to pay the same tax and national insurance contributions as full-time workers – without receiving the same benefits. This will also target freelancers supplying services to clients via an intermediary such as a private service company.

HMRC says only 10% of private sector freelancers currently pay the right tax, so the underlying intent looks excellent, identifying people in “disguised employment” and underpaying their taxes. Yet the regulation looks ill-conceived rather than a considered process. Instead of looking at individual companies and investigating irregularities in those, HMRC has decided to instigate a sweeping approach.

Many businesses and their HR departments are not prepared for such a change, and are already under pressure working out what will happen when the Brexit transition period comes to an end on 31 December 2020. Resources within the companies are already stretched, and they need more time to comply with the rules.

The lack of clarity, and changing tone of announcements coming from the government has led to some organisations deciding to take a blanket contractor ban, rather than taking a more nuanced approach which the legislation technically allows.

Afraid of falling foul of taxman, many companies are putting all contractors on PAYE, regardless of whether they fall within IR35, as seen in the cases of Barclays, HSBC, GSK and Morgan Stanley to name a few.

This will lead to consultants who are genuinely working outside of IR35 regulations no longer being able to use their limited company. Thus discouraging many valuable experts from the roles they typically fill.

HMRC obliges hirers to determine tax status within 45 days. But in reality, most consultants are being advised that the hiring client won’t allow personal service companies (PSCs). There are further worrying retrospective aspects of taxation being introduced with the law. This means contractors may be at risk of HMRC trying to retrospectively claim national insurance for up to 10 years.

UK business benefits from having a flexible, on-demand group of experts which can be called in when needed. That IR35 is defacto outlawing contractors will deprive companies of this on-demand skill set.

A recent survey of Bishopgate Financial’s network of contractors has shown that these changes have caused personal stress (79%) and has affected their mental health (42%). More than half (54%) said they are planning to move abroad, so the UK will lose these people in a time of full-employment and talent shortages. Research from the Association of Independent Professionals and the Self-Employed (IPSE) reflects a similar sentiment. It indicates contractor confidence is at a record low, with one in three saying the changes will lead them to stop freelancing in the UK altogether, again reducing the country’s competitiveness.

In a recent speech chancellor Rishi Sunak mentioned the government won’t be ‘heavy-handed’ in the first year. This does not really address the issues. Unfortunately, in a hunt to combat disguised employment, many freelancers are getting embroiled in the decision of right and wrong. Rather than demonising the whole contractor community, HMRC should work on its unclear and weak definition of “disguised employment”.

The government must collaborate with businesses to find solutions rather than just throw challenges at firms and leave them to their own devices. This risks making the UK less competitive, depriving companies of flexibility to scale up and down as needed. The UK is also facing a talent gap in key sectors such as the financial services which is heavily reliant on contractor talent.

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A radical approach would be an overhaul of our current tax system. Tinkering with existing tax arrangements does not cut it. We need a root and branch review and change. A simplified system will have clear definitions making it tough for people to dodge taxes, meaning companies won’t have to apply a blanket ban scuffling our growing gig environment.

HMRC’s unclear direction has spooked many UK businesses which are now shredding their flexible workforce. However, this shouldn’t be the case. Businesses and government must work together to prevent IR35 becoming a textbook example of causing unintended consequences.