As the Chancellor stood to deliver his Budget speech last week, a great many contractors and businesses serving the UK’s independent workforce held their breath.
After all, this was the Budget in which it had been rumoured Philip Hammond would announce plans to extend IR35 reform to the private sector. And it happened. Towards the end of his speech, the Chancellor revealed that further changes will be enforced from April 2020 and engagers will be handed the responsibility for administering IR35 – a move which will also see them carry the liability.
There was a slight twist in the plot, with Mr Hammond revealing that only medium and large private sector engagers will need to decide the IR35 status of contractors come 2020. Making 1.5 million small businesses exempt seems to be a smart move and one welcomed by IR35 specialists.
But this concession doesn’t change the overall picture. News of further reform was the announcement the vast majority of UK businesses didn’t want to hear. You might argue that it contradicts the Chancellor’s claim that this is a Budget for ‘hard working families, for strivers, grafters and carers.’ Certainly, promises from Mr Hammond to ‘always back enterprise’ and his recurring rhetoric that ‘Britain is open for business’ will be lost on many contractors and the businesses engaging these workers.
Of course, most IR35 experts had predicted reform, and for some time these changes have seemed a matter of when and not if. There was however some degree of relief when the Chancellor said he’d chosen to ‘delay’ reform until 2020, meaning the chaos that would have likely ensued with an April 2019 roll-out can be avoided.
By extending changes, the contracting community feels as though the Government has ignored the evidence that demonstrates public sector IR35 reform is not working. They feel let down by an administration that seems interested in raising revenue by any means possible, even when this results in contractors being wrongly taxed.
But should we be surprised? The past few years in particular have shown the Government suspects contractors of widespread tax avoidance and sees reform to the IR35 legislation as the most appropriate way to combat it. In fact, reports say reform will be the Government’s ‘biggest new revenue-raiser’, and in its first year could earn the Treasury £1.3bn in tax that – according to HMRC – is currently missing.
The document released immediately after the Chancellor’s Budget speech revealed public sector reform, introduced in 2017, has so far brought in an extra £550m in tax and NICs for the Government. So, on the face of it, the Treasury’s plan to raise tax receipts is working. Or is it? With thousands of independent workers placed inside the rules without a fair or accurate status assessment, there’s no evidence to show IR35 compliance has improved – assuming it has ever been an issue big enough to warrant such radical changes in legislation.
So, what happens next? A further consultation will be published in due course, which may result in a few amendments to the practical application of reform, which medium and large engagers are being advised to prepare from now, regardless of the fact changes will not be introduced until 2020. This consultation will inform the draft Finance Bill legislation expected to land next summer.
In addition to this, the Government has said it recognises the diverse needs of the private sector and promised to provide extensive support to help engagers implement the rules. You might recall, HMRC faced huge criticism for offering little guidance to public sector organisations, so any way of genuinely assisting private sector businesses is welcome. This time round the Government will be expected to deliver.
Yet another pledge has been made to improve HMRC’s IR35 Check Employment Status for Tax tool (CEST). The technology’s failings – which became all the more apparent in a court case recently – have not gone unnoticed, and specialists have consistently voiced concerns that it has contributed to hundreds of thousands of IR35 assessments. But again, action speaks louder than words and the sector will want to see dramatic improvements.
With changes on the horizon, the onus is now on medium and large engagers – those with either a net turnover above £10m, a balance sheet total over £5.1m or more than 50 employees – to get to work.
The consensus is that while reform is a short-sighted tax cash grab from the Government, it can be dealt with. This is not a reason to panic, nor a reason for private sector engagers to start making risk averse and blanket IR35 determinations. It is a time to prepare for ‘manageable’ changes.
In his Budget speech, Philip Hammond declared the ‘economy is back on its feet again’ and it is ‘an economy working for everyone.’ With IR35 reform now confirmed, the Government is under pressure to make sure these words ring true in the coming years.