Under pressure to raise tax revenues, the chancellor introduced IR35 reform in the public sector last year, in what many considered the pilot project for the recently announced private sector changes.
Now, with all public sector engagers in charge of setting a contractor’s IR35 status and also liable for any mistakes should HMRC investigate, thousands of contractors have been placed inside IR35 without a fair review of their working arrangement.
These organisations were not helped by the government’s haphazard implementation of reform and were perhaps motivated to protect their own liability – which can run to hundreds of thousands of pounds.
A number of public sector bodies made risk-averse IR35 decisions, which resulted in contractors being taxed like employees, yet without receiving any of the rights that come with employment - a lose-lose as far as a contractor is concerned.
Are the reforms working?
Despite the unrest caused by these measures, the government truly believes public sector reform has worked. But their only measure of success seems to be the additional £550m raised through reform so far.
Questions still remain over whether it has been collected fairly or improved IR35 compliance at all. It is very possible that thousands of contractors have been wrongly placed inside IR35 and therefore have been overtaxed.
As a result of chaotic public sector changes, disenchanted contractors left the sector, which led to skills gaps and caused project delays. As you can imagine, contractors would rather work outside IR35, or at the very least, have a fair shot at having their tax status properly assessed.
With private sector reform on the horizon, it is vital there is not a repeat performance of public sector changes. It is also in the interests of private sector companies for projects that belong outside IR35, to sit outside the rules. After all, companies will be needlessly paying employers NICs if they wrongly place contractors inside the rules.
The focus is now on medium and large companies – those with a net turnover of more than £10.2m, a balance sheet total greater than £5.1m or more than 50 employees – to prepare well in advance of the 2020 rollout.
Recruitment agencies also have a role to play in all of this. When handling payments on behalf of the end client, it is widely expected agencies will carry the IR35 liability, despite the fact the engager remains responsible for making the decision.
The specific details of changes are yet to be published, but there is no reason to believe agencies will avoid some sort of liability or obligation.
Lessons learned
So, can the private sector manage incoming reform and continue to engage contractors outside IR35 while, at the same time, protect their own liability? In short, yes.
