Caution – IR35 at work! What the Autumn Statement means for contractors

11 December 2016

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No doubt about it, Philip Hammond’s first and last Autumn Statement heralded some seismic changes in the contracting world. Now that the dust has settled, contractors should be aware of the effects these changes will have - not just in the public sector but for the wider contracting community.

However, let’s look first at the public sector, where Personal Service Company (PSC) Contractors are now no longer in control of their own destiny. In a nutshell, it is now for the client to decide whether the contractor is operating inside or outside IR35. If the client decides that they are inside IR35, then the paying body (likely the agency) will have to operate tax and NI.

The obvious problem is that the person or body making the decision on the status of a contractor may neither have sufficient knowledge of the engagement nor the relevant experience to make such decisions. While HMRC seem confident that the public sector is experienced in making these decisions, our experience is overwhelmingly that they are not. Rather than get it wrong, many public sector bodies will err on the side of caution, prompting “inside IR35” decisions.

So what are the wider implications of these reforms? For a start, there are obvious tax and NI costs to the PSC. I estimate that these are likely to be a minimum of £10k per year, but it goes much deeper than that: end-user clients and agencies (especially smaller agencies) will see their compliance costs increase. In fact, HMRC admitted as much in their Impact Statement. The end-user will seek to keep their own costs level, and the supply chain will rightly insist on maintaining their margin, so the unavoidable outcome will be a significant squeeze on rates. The PSC will be faced with an unfortunate double whammy: smaller fees and more tax.

Guess what? Talented contractors aren’t going to hang around the public sector if the grass is greener in the private sector. That’s why this ill-conceived legislation is so unfair: if the rules are good enough for one, they are good enough for all. And what about standards in the public sector? With the best and most talented moving over to the private sector (or further afield), public sector bodies will be forced to accept less talented workers on demotivating rates, bringing an already ailing public sector to its knees. Moreover, the concomitant growth of the talent pool in the private sector means the laws of supply and demand will kick in, driving rates down further here as well. Cue, a potential mass exodus overseas at a time when Brexit means we need to be attracting and retaining talent in the UK! In a race to the bottom no-one wins, but this is precisely the race the Treasury seem intent on running.

While you’re contemplating this bleak future, consider this: In his past life, the new chancellor, like many businessmen, has used the tax system (perfectly legally) to his advantage; giving his wife a stake in the business to make use of her personal tax allowance and also drawing dividends on top of a salary to reduce his NI contributions.  As one Westminster insider told the FT in August, “He’s a poacher turned gamekeeper.”  Mr Hammond and his ilk could do well to remember his experiences as a government contractor and the risks involved. Just because someone doesn’t pay PAYE, that doesn’t necessarily make them a tax-dodger. There are undeniable risks associated with being a contractor, and the ability to arrange his or her tax affairs is the contractor’s pay off. The chancellor seems intent on ignoring this essential, flexible part of the workforce and the very real contribution they (i.e. you if you’re a self-employed contractor reading this!) make to the economy of this country…

Alan Broome pictureAlan Broome, Broomeaffinity

Comments

Good article, when do these changes take effect and are they likely to be retrospective?
Posted on Wednesday, December 21, 2016 15:24 by Bob
Good article, when do these changes take effect and are they likely to be retrospective?
Posted on Wednesday, December 21, 2016 15:11 by Bob

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