More than 600 freelance workers protested in the shivering cold outside Parliament last week. They are backed by an intensive business lobby, representing hundreds of thousands of businesses that share the disquiet on show in Westminster over reform of a complicated tax law on off-payroll working, known as IR35.
From April 6, responsibility for assessing the employment status of off-payroll workers will shift from individuals to their hirers. The rule change affects about 230,000 contractors in the UK. All companies — apart from those with fewer than 50 employees or less than £10.2m annual turnover — will need to comply. Firms and recruitment agencies will become liable for unpaid tax if HM Revenue & Customs finds a worker has been wrongly classified.
The plans have infuriated businesses and contractors, especially those heavily reliant on freelancers such as financial services, construction, pharmaceuticals, energy and recruitment. The reforms are part of a crackdown on so-called “disguised employment”. This is when workers — who bill for their services via limited companies — avoid paying income tax and national insurance contributions, despite effectively being employees, and instead paying corporate taxes that are typically lower.
Companies also benefit from this arrangement by avoiding employers’ national insurance. HMRC estimates only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. The reforms are projected to bring in £3bn over the next four years.
[How can the Treasury expect businesses to accurately apply IR35 to their contractors . . . when HMRC and tax judges struggle Andy Chamberlain
But Tej Parikh, chief economist at the Institute of Directors, the business lobby group, said the planned changes were “hampering” businesses. “Many firms remain unprepared for the legislation, given its complexity.”
Companies including Deutsche Bank, Lloyds and Reuters have already suffered a backlash from contractors after facing demands that they take pay cuts. Critics are concerned the new rules could have a wider impact on the economy.
Dave Chaplin, director of the Stop the Off-Payroll Tax campaign, said: “There is about to be an unofficial strike by a quarter of a million workers, and the impact on productivity for all firms that currently rely on them will be immense.”
A monthly jobs report produced by the Recruitment & Employment Confederation, a trade body, found that billings by agencies for temporary staff fell in January, for the first time since April 2013.
Many respondents blamed IR35. “The temporary labour market is being stifled, and that’s not good for employers or our economy,” said Neil Carberry, chief executive of the REC.
A third of respondents to a survey of 3,400 freelancers by the Association of Independent Professionals and the Self-Employed (IPSE) said they planned to stop contracting in the UK.
“Fear of brain drain is widespread, which will lead to a short-term and long-term economic impact that could outweigh HMRC’s business case,” said James Poyser, CEO of inniAccounts, an online accountancy for contractors. The government has estimated that the reforms will cost businesses £14.4m annually. However, tax experts told peers last week that this estimate was far too low.
The reforms require companies to take “reasonable care” in assessing whether their contractors are disguised employees or genuinely self-employed.
But working out a contractor’s employment status is complicated as illustrated by the a string IR35 cases that HMRC has lost at the tax tribunal. Relevant factors include the autonomy a contractor has over their work, if they can send a substitute in their place and how much “mutual obligation” exists in their relationship with their hiring company.
HMRC has developed an online tool to help companies but many tax experts and businesses have warned it is flawed. HMRC, which has recently made some changes to the tool, said it stood by it and was accurate if used in line with its guidance. However, it acknowledged the tool only works in 85 per cent of cases.
“We remain at a loss how the Treasury expects . . . businesses to accurately apply IR35 to their contractors . . . when HMRC and tax judges struggle,” said Andy Chamberlain, deputy policy director at IPSE.
While some firms are diligently carrying out individual assessments, others have decided to stop using contractors through limited companies from April.
Other companies are choosing to absorb the extra cost of taking on existing contractors as employees. Or they are asking their recruitment agencies to add contractors to their payrolls. Many recruiters are in turn outsourcing this task to payroll agencies, known as umbrella companies. Nevertheless, all these strategies are rife with risks.
Chief among these is a backlash from contractors if they believe they are genuinely self-employed. This has already led to walkouts — and knock on delays in projects — in response companies cutting rates to offset the increased costs of taking on more employees. Mr Poyser said his clients were reporting reductions in take-home pay of up to 40 per cent.
The lack of regulation of the umbrella industry is yet another pitfall. Julia Kermode, chief executive of the Freelancer & Contractor Services Association, said that while many were genuine, hundreds are fronts for tax avoidance.
Companies also need to be careful as the new rules allow the tax liabilities to be transferred through the labour supply chain.
Meanwhile, being classified as employed for tax purposes does not automatically give individuals the same rights as employees. This is because the UK has separate laws for employment rights and employment tax status.
Despite the protest, the government has said it will push ahead with the changes along with a review into the reforms. Jesse Norman, treasury minister, told MPs last week that businesses had been given 18 months to prepare. “We are conducting a review to ensure that this is as smooth as possible,” he said.
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