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IR35 – good, bad or indifferent?

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A new survey on the impact of the IR35 rules on the public sector suggests it has been “very negative.”  Carried out by recruitment company Harvey Nash, this research was published at the same time the government released its response to the Business, Energy and Industrial Strategy (BEIS) and Work & Pensions committees’ report on a framework for modern employment, in turn based on the recent Taylor Reviewon that subject. IR35 is inextricably linked to this new approach to “modern” employment: “modern” being a synonym for “taxable” in the eyes of some cynics!

There has been a lot of controversy about IR35, particularly around whether an individual’s status (and thus whether they come under the new regulations) is correctly identified by HMRC’s online IR35 identification tool. Consequently, it’s good to see that the first recommendation in the BEIS committee’s report is that We recommend the Government legislates to introduce greater clarity on definitions of employment status. This legislation should emphasise the importance of control and supervision of workers by a company, rather than a narrow focus on substitution, in distinguishing between workers and the genuine self-employed.”

While improved clarity is key, the other effects of the IR35 changes are equally important.  Of those who responded to Harvey Nash’s survey, some 50% believe there has been a reduction in available contracts, with 43% also believing they had paid more tax (as noted below, one of the government’s objectives) and 49% now only seeking private sector contract jobs.  

Those private sector opportunities may not be quite so attractive soon.  Although when the IR35 changes were first mooted the government denied that there were plans to extend them from the public to the private sector, it subsequently appeared that this was what was intended all along. There was no mention of this in the Chancellor’s recent Spring Statement, leading some to think it had been kicked into the long grass, but other commentators expect that it’s not a question of if but when.

That said, the ongoing debate in government about tax and self-employment cannot disguise the fact that there is a lot of evidence (not just from the Harvey Nash study) that, as well as only seeking private sector jobs, contractors are raising their rates to compensate for the increase in tax they are paying if they come under IR35.  This, in turn, drives up the cost of public sector projects, which means we all pay. Put this system into the private sector and the impact may well be a further increase in the costs of goods and services. 

For the government, this is about fairness: trying to remove the disparity between the amount of tax paid by contractors providing their services through an intermediary and those who were employed directly by a company. With the increase in self-employment over the last few years, not just in construction but across the board, there is an obvious concern for the government that the tax take might decline, yet the issue is complicated by the other pros and cons of self-employment that the Taylor Review has tried to tackle. Clearly, if you are self-employed you don’t get all the benefits that an employed person does, so the argument goes that this means it’s reasonable that you don’t pay so much tax.  In response, the Taylor Review considers how to extend some of the benefits of the employed to the self-employed, albeit ignoring the fact that for many self-employed it’s simply not realistic to take time off for extended maternity/paternity leave, holidays, minor illnesses, etc. It is a complicated arena for both politics and business and it’s not going to be made any easier by the former rushing ahead without considering all the ramifications.

Whether you think IR35 is good or bad, it’s important not to be indifferent to it. A lot of people in construction are contractors and if IR35 is eventually extended to the private sector then it’s going to have a substantial impact for all those deemed to fall within its scope. 

Craig Wishart, Senior Recruitment Consultant, Peace Recruitment

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