IR35 reform is Budget 2018's biggest revenue-raiser
Figures from HM Treasury confirm that Philip Hammond will earn more off incorporated freelancers than any other group of taxpayers by imposing 2017’s off-payroll rules across the board.
The rules will, overall and in the fours years from their introduction in April 2021, net £3.1billion for the exchequer, peaking in 2021/22 at a projected £1.2billion.
That means the Treasury’s haul will decline in subsequent years (falling to a low in 2022/23) seemingly because, aware of the legislation, end-users will bring contractors onto the payroll.
“It is going to be the client who decides…[IR35] and although people might fight the decision”, begins Sam Turner of London recruiters Morgan McKinley.
“I guarantee that the clients are not going to want to open themselves up to [the] risk, [what] with HMRC and its tax implications.”
'On the hook'
But it is recruitment agencies themselves who also stand to suffer according to Julian Ball, legal director of PayStream.
“If the recruitment business does not correctly identify an assignment as inside IR35 and they continue to pay the PSC gross, they may be liable to pay PAYE and NI on the assignment income to HMRC if the assignment is found to be caught by IR35.”
He added: “There are circumstances where this liability may be passed up the chain to a client, such as if the client has failed to assist when asked to do so in making an assessment, but the reality is that it is the recruitment business that will be on the hook in the vast majority of cases.”
Either way, if so-called 'Statement of Works' do not draw the traction which some agencies say they will, one upshot is that freelance contractors might simply not put themselves forward.
“These changes are likely to have the effect of deterring contractors from working on contracts where [organisations] are forced to apply these rules,” says Michael Powner, a partner at Charles Russell Speechlys.
Yet consultants should not make any sudden moves, advises Morgan McKinley’s Mr Turner who, rather aptly, works in Risk.
“Whatever you decide as a contractor, do not be hasty,” he said. “The job market is not as buoyant on contract as it is on the permanent side, and you might be entering a very tricky job market.
“So you might have a reduction in income compared to what you were on if you are suddenly put inside IR35, but you will…probably still [be] on more of a take-home [packet] than your permanent counterparts.
“[And] if you do what TFL contractors did and just leave, there are probably many people who can take your place because currently, people don’t want to be relocated to Paris or Frankfurt [as a result of Brexit], so are entering the job market in droves.”
Figures from the Treasury suggest only 10% of PSCs are correctly applying IR35, giving rise to an approximate £700m a year tax leak, increasing to an estimated £1.3bn in 2023/24.
But reform won’t just be more expensive for freelance consultants. According to Deloitte, engagers’ costs will increase by 22% if they want to keep their consultants' take-home pay (after tax) intact, as the firm’s table, below, shows.
|Worker with fees £500 per day, or £105,000 p.a.||Carry on paying the same rate||Reduce the day rate to keep the engager break-even||Increase the day rate to keep the worker break-even|
|Impact on Worker’s net income||-4%||-13%||Nil|
|Impact on the Engager’s costs||+13%||Nil||+22%|
But apparently not a lot of engagers will be affected, as the government’s IR35 reform consultation reply says over 95% of firms will be outside the 2020 rules, due to the announced ‘small business exemption.’
David Whiscombe, consultant at BKL, isn’t convinced. “By excluding SMEs from the new rules, the government says that ‘over 95% of businesses will not need to apply the reform.’
“This is disingenuous,” he said. “My experience is that the overwhelming majority of engagements are made by medium to large businesses anyway.”
To head off further accusations, such as that it is leaving firms in limbo due to the 2021 rules being unknown, HMRC have said they will use the likes of the Companies Act to define ‘small business.’
'No more than 50 employees'
“They [HMRC] will apparently be using the audit threshold limits”, said David Kirk of chartered tax advisory David Kirk & Co, which initially believed an EU directive would provide the definition.
“They are that a company fulfils two of the following criteria: turnover no more than £10.2m, total assets no more than £5.1m, no more than 50 employees.”
Yet there is still the worrisome issue for enterprise of the final framework for off-payroll work in the private sector becoming visible far too close to the commencement date.
Such is the warning from tax giant EY, where partner Chris Sanger points out that at £1bn, IR35 reform raises more in a single year than any other measure in the entire Budget.
Mr Sanger also said: “The planned further consultation on the operational details means that employers may not have certainty until late 2019.
“This may not allow enough time for changes to be made to systems if business await the outcome of these consultations before acting.”
And it is actions, not objections, that businesses now need to come forward with, according to Lucy Smith, director of the umbrella division at Dolan Accountancy.
“Time [between now and April 2021] may be better spent looking at how the government can stop any basket approaches to the reform,” she said.
“The question is; do we spend the time battling against something which is unlikely to be changed, or do we work with them to make sure that it is implemented in a way that works?”
4th November 2018