The consultation period and hence the chance for contractors to object directly to the taxman about the much criticised IR35 proposals has passed. This does not mean a time for action has ended. IPSE (The Association of Independent Professionals and the Self-Employed) are urging people to contact their local MP and outline why this overhaul for contractors working in the public sector is an ultimately misguided and potentially disastrous plan.
If you’ve forgotten what will happen when the new proposals take effect here is a quick reminder:
1.Contractors working on public sector engagements will no longer be responsible for assessing their own IR35 status. The responsibility will move to the public sector end-client, or – if there is an agency in the chain – to the agency.
This shift in liability is a major concern for contractors. Clients and agencies will not want to risk getting an IR35 decision wrong and because it is so complicated it is virtually impossible to be certain that such a decision is ever right. It is assumed hirers will end up having a blanket rule that IR35 will apply to all engagements so as to avoid liability further down the line.
2.If the client or agency decide IR35 does apply, tax will be deducted before payment to the contractor is made – as it is for employees. This means the client will pay Employer’s National Insurance Contributions (NI), and the contractor will pay Employee’s NI as well as PAYE.
3.Contractor businesses used to paying tax after the financial year has ended will now have to pay tax before money is received, which can result in cash flow issues.
4.Employment rights will not apply, even where contractor businesses are paying tax like employees. SO contractors will still not receive pension entitlements, holiday pay, sick pay etc…even though they are paying tax in a very similar way to employees who continue to get those benefits.
What then shall be the end result in these changes. Essentially a huge hit for the public sector. A survey of contractors carried out suggested that many would either leave the public sector or increase their rates to offset any additional tax liability. For the public sector then expect a huge skills shortage, soaring costs and massive delays.
What seems most odd is that even with the Government’s most generous increased revenue predictions are still rather paltry especially considering the huge upheavals expected.
There is still time for alterations before this ill-thought out policy comes into being, however it is now down to individual MPs and the pressure their constituents can impress upon them to hopefully reach a resolution far away from the reality outlined above.