2017 has been an eventful year with regards to IR35. At a glance, confusion defined the lead up to April and public sector reform, chaos predictably arrived soon after and with the dust beginning to settle, heads have now turned towards potential private sector reform.
Broken down, here’s how the past 12 months have played out from an IR35 perspective.
Pressure to make an IR35 U-Turn falls on deaf ears.
In the early months of 2017, much of the conversation had been focused on the potential damage that public sector IR35 reform would have on the independent workforce.
Research revealed that 85% of independent workers were prepared to down tools and stop working in the public sector for good should they be wrongly placed inside IR35 by their clients.
As April 6th – the date of public sector reform – drew closer, the realisation that the Government intended to see this through dawned.
In March’s Spring Budget, The Chancellor ignored huge pressure to make a last-minute U-turn on April’s planned IR35 reform. Without as much of a mention in his Budget speech, contractors and public sector engagers braced themselves for the reality of reform in a matter of weeks
The release of a tool not fit for purpose
And it was in March that HMRC and the Government hurriedly released its ESS Tool (later renamed to CEST) – the technology designed to help public sector engagers make IR35 determinations. Unsurprisingly, the grand unveiling was met with a huge backlash from IR35 experts for its inaccuracies.
Relying heavily on new and untried technology to make status decisions which can carry up to six figure tax liabilities was a huge risk. Research highlighted that another 85% of contractors did not trust the tool to make accurate IR35 determinations with regards to their status.
Further down the line contractors’ concerns were justified. Being tweaked on-the-go by the Government and HMRC meant that many contractors who undertook similar projects in similar roles were being given entirely different results. The ESS/CEST Tool also relies heavily on substitution when giving an IR35 determination, simply adding to the confusion.
With public sector changes a matter of weeks away, a public sector exodus beckoned.
Public sector IR35 reform arrives
6th April and the start of the new financial year marked the introduction of long-awaited public sector reform. Engagers were now responsible and liable for setting the IR35 status of the contractors they engage
Blanket determinations begin
Despite the IR35 legislation highlighting the need for end engagers to take ‘reasonable care’ when setting the status of contractors, a number of public sector bodies ignored this. For example, The NHS placed its entire contractor and locum workforce inside IR35 in an attempt to protect themselves.
However, blanket determinations are short-sighted and simply deter contractors from working with particular clients. Faced with a prospect of a contractor walkout, The NHS reversed their initial stance and promised to assess contractors on a ‘case-by-case basis’.
HMRC Claim reform is working
The Government and HMRC released a flurry of material claiming that IR35 reform is working. The Treasury’s Mel Stride recently explained:
“Early analysis of tax receipts between April and June shows that around 90,000 additional new engagements occurred in the public sector above the level that would normally be expected. This indicates more individuals are being taxed as employees since the reforms, and is consistent with the Government’s expectations that the reforms would increase tax compliance in the public sector.”
However, 90,000 contractors working under IR35 since reform does not indicate increased compliance. Numerous public sector bodies made blanket and knee-jerk inside IR35 determinations simply to safeguard themselves – a move which increased the number of workers operating under IR35
IR35 Consultation Announced in Autumn Budget
Last month, UK Business held its breath as The Chancellor made his Budget speech. Speculation had been mounting about the possibility of IR35 reform being extended to the private sector as early as 2018.
Much to the relief of contractors and the private sector, no such changes were announced. The ‘Red Book’ outlined the Government’s plans to hold an IR35 consultation early next year to assess the true impact of public sector reform and explore the possibility of rolling out similar changes to the private sector.
Whether this is simply delaying the inevitable remains to be seen. That Government will be holding a consultation should not gloss over the fact they are failing the UK’s 2m freelancers and contractors when it comes to IR35.
Further changes to IR35 are widely expected in due course, emphasising the need for private sector engagers to ensu