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Extension of IR35 Legislation to the Private Sector is Damaging

6th March, 2020

The impact of new IR35 legislation, which is being introduced in April 2020, may stretch far beyond the individuals it is intended to target and could undermine a major part of our economy, says Tim Haggard, Partner at Haggards Crowther.

Here at Haggards Crowther, we are already seeing the extension of IR35 to the private sector impacting on the number of freelancers/contractors making the move from employment to self-employment. In economically uncertain times, this is concerning because it removes one method of a company managing a change in demand or planned reduction in overheads. We fully expect that it will lead to the announcement of more genuine redundancies, with businesses unable or unwilling to engage former employees for fear of falling into the IR35 trap.

Historically, companies have been able to streamline or manage their headcount by hiring former employees as contractors or freelancers. This removes the long-term commitment from the P&L whilst retaining valuable skills. In return, the individual is able to step away from the company and start up on their own, with an initial commitment and the opportunity to seek other work.

We are repeatedly told by the media how micro and small businesses have supported the economy over the last decade and so the short termist tax grab of this move potentially cuts off the flow of new entrepreneurial start-ups.

Whilst HMRC has eyed the opportunity to bring in more than £3bn in additional tax between 2020 and 2024 with the extension of IR35, one has to question whether they have weighed up the long term impact and the reduction in business tax from those new limited companies that simply wont exist. Aside from the tax income perspective, what is the cost if companies do turn to redundancies as a means of managing headcount and what could be the impact on GDP and productivity?

Of course, we understand the need for even handed application of tax legislation, but as an accountancy firm working with companies and individuals on both sides of this change, we just don’t believe that HMRC has fully thought it through. 

What’s changing with IR35 and the Private Sector?

From 6th April 2020, the decision on the tax status of a contractor will fall to the business awarding the contract, not the individual contractor, as it is currently. In making this decision, the business will have to decide how flexible their engagement is with the contractor. The determination of whether a position is IR35 is ultimately one of employment law and relates directly to the underlying contract.

Since its introduction in 1999, it was up to the contractor to determine how flexible their position was, for instance:

  • do they work for a fixed project fee or daily rate?
  • are they paid on completion of the works, or weekly/monthly?
  • do they have multiple clients or only one or two?
  • and most importantly, do they get to choose where and how the work is carried out?

The less flexible the contract, the more likely that it will fall under IR35.

IR35 was extended to the public sector in April 2017 and this latest change sees it rolled out to cover private sector businesses too.  However, it should be noted that initially it will not apply to the UKs 3.5million sole traders or businesses where any two of the following apply:

  • Turnover is less than £10.2m
  • They have a balance sheet of less than £51m
  • They have less than 50 employees

…although we fully anticipate, as with all taxes, that this is a creeping barrage and will be extended to cover all businesses and sole traders – another reason why it is likely to have a broader impact.

What is IR35?

IR35 was originally introduced in 1999 as a means of closing a tax loophole, used by the self-employed to minimise their tax. It specifically targets those individuals that use a Limited Company shell to work as a contractor for another business and in particular, those for whom that contract is the overwhelming majority or sole source of income. Effectively, HMRC wants to make sure that individuals who, to all intents and purposes, are working as an employee of the contracting firm, pay the same tax and NI as a permanent employee would.