Private sector IR35 reform: waiting for the other shoe to drop
Long before controversial public sector IR35 reform was introduced in April, speculation was mounting that the private sector would face similar changes. And in fact, public sector reform was simply seen as a test-run for the private sector by many, writes Seb Maley, Qdos Contractor's CEO.
While private sector IR35 reform has not yet been confirmed by the government, the rumour that this might well happen in time does have substance. Along with increasing media attention, private sector IR35 reform is a topic hotly discussed among freelance contractors on forums, especially ContractorUK’s. What’s more, I don’t think I’ve spoken to one person -- from freelance contractors, to agencies and experts from ‘The Big 4’ accountancy firms -- who does not think it will be introduced in time.
Having two significantly different versions of the same legislation for what is essentially one group of taxpayers is not viable in the long term. It makes an already complex piece of legislation all the more complicated, and naturally makes the private sector a far more appealing prospect for freelancers and contractors; something which government departments became acutely aware of during the implementation of public sector reform earlier this year.
While the rolling out of public sector reform was -- and to a certain extent still is -- a mess, I think HMRC will be relatively pleased with the overall impact of the changes. From where they stand, a number of ‘freelance’ contractors who should have been operating inside IR35 now are. Given that HMRC most likely consider public sector reform a success so far, why wouldn’t they roll the same changes out to the private sector?
If and when it happens, the legislation itself will, I imagine, be the same. However the difference, I hope, will be in the implementation. Recent changes to public sector IR35 were shrouded in confusion, which embarrassingly for the department, and its political masters, was largely down to late and disappointing guidance from HMRC. If those changes are introduced in the private sector, there will at least be a tried and tested roadmap. The Revenue must learn from previous mistakes though, and implement reform and in a more structured way.
‘Time to prepare’
A mooted about April 2018 implementation is unlikely, but not impossible. If this turns out to be the case, private sector reform would probably be announced in this year’s Autumn Budget. However, it’s more realistic that the government will give themselves a little more time to prepare by introducing the reform (the extension of the off-payroll rules) in 2019, meaning an announcement could be made at some point next year. With that said, don’t rule out any surprises.
HMRC has already stated that the ESS (the IR35 digital tool) isn’t just for the public sector, and can be used by anyone. Therefore, I can’t imagine any notable adjustments for the purpose of wider reform. Upon its release, the tool rightfully came under fire for delivering inconsistent results -- an issue which has led to the continuous tinkering of its questions and logic. Whether this would be the case with the tool in the private sector remains to be seen.
From what I can see and know of each of them, the private sector will be far less risk averse than the public sector, which is of course a good thing for freelance and contract professionals. I can’t imagine nearly as many panicked, knee-jerk reactions and blanket determinations. And with a bit of luck, the government will leave enough time between announcing and enforcing reform for businesses to prepare.
If managed properly, potential changes in the private sector can in fact work, contrary to common belief. Numerous public sector agencies are already coping with the recent changes, and continue to engage with many freelance consultants, who remain outside IR35. So the prospect of private sector reform should not in any way, shape or form create panic that freelance contractors are somehow doomed.
The Revenue could even inspire some confidence in the coming weeks or months, because it is just about to embark on its first enforcement round of the April rules. These checks will, initially at least, be largely informal enquiries at public sector organisations. Inspectors demonstrating a firm, fair, proportionate as well as practically-minded approach in HMRC’s enforcement could reassure the many who have jitters about the tax authority doing the same policing, eventually, at private sector companies.
So whether (as we expect) HMRC scrutinises blanket ‘inside’ and ‘outside’ determinations, how the ESS was used and if ‘reasonable care’ was taken, will all be watched keenly by all in the freelance work sector, not just those immediately in the taxman’s crosshairs. However, he will be on the look-out too of course.
It’s likely to take several months before these checks begin to have any
real impact on the entire market, but HMRC will have no qualms about targeting
and perhaps even formally investigating any organisation or department
immediately, should they not like what they see.