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IR35 amendment could be rolled out across the Private sector as early as 2018

Posted by: Jemma Puzey


There are growing fears that the new IR35 legalisation, which was introduced for the public sector in April this year, will be extended into the private sector as early as April 2018.

The new IR35 legalisation has meant that contractors working in the public sector now have their tax status determined by the organisations hiring them. Those deemed to be within IR35 are then treated as employees for tax purposes and have PAYE and NI contributions deducted at the source of payment. This has resulted in significant pay cuts, with reductions of up to 30% in take home pay for some. Additionally, many contractors are claiming that HMRC’s tools for determining their status is in fact, inaccurate.

The new legalisation was pushed though in a rush and without much preparation in an attempt to raise an extra £185 million in taxes this year. However, since the implementation the sector has seen a sharp rise in consultancies funnelling their contractors through low cost umbrellas companies instead of PSC’s. Whereas some contractors are freezing their PSC’s and taking fixed term positions and others are just retiring early to avoid the change in IR35.

This behaviour is doing two things; firstly it means that companies are losing experience and skills mid-way through projects. Secondly, it is entirely defeating the point of the amendment because HMRC will now be receiving less tax than they would have in the first place without the new legalisation!

One of the reasons behind the new legislation is to create fairer tax rules for two people doing the same job. However, an employee and a contractor may be doing the same job, but not with the same benefits. Contractors don’t get same security or rights as employees, nor do they receive holiday or sick pay or even definite payment for work completed. It’s that risk which is reflected in the payment of less tax.

Further, since the amendment many contractors are leaving public sector institutions in their droves and others are entirely boycotting the sector. This has resulted in institutions having to buckle to contractor demands of up to 20% pay hikes because they need to attract the talent to do the jobs.

Ironically, this extra pay means that the government is spending more money for people doing the same job; it feels HMRC are just being counter productive.

It’s a highly damaging piece of legislation as it is, but extending it to the private sector could be a complete disaster. Especially in light of Brexit, Britain now needs to remain an attractive location to do business.

The gig economy has contributed massively and it’s concerning that the government are prepared to jeopardise this source of income.

Although the government has not confirmed a set date for the private sector, it doesn’t make sense to have two separate tax rules.

It is likely that the public sector has been a “dry run” and once the processes have settled down there is no reason why the new legislation won’t be rolled out across the private sector too.

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