Taxing times – is IR35 in the private sector a step too far?
By Dave Brooks, Managing Director at 247 Time
The forthcoming roll-out of the IR35 rules to the Private sector is being predicted to be a great success by the government, perhaps unsurprisingly, despite the bad press it has received over recent weeks.
Whilst IR35 has been in place in the Private sector since 1999, it’s only now that the success experienced through the public sector has encouraged the Government to step up compliance in the private sector. It is aimed at combating tax avoidance by workers who supply their labour or services through an intermediary, such as a limited company, but who would be otherwise be a direct employee if that intermediary didn’t exist.
HMRC calls these workers “disguised employees”. If they fall inside of IR35 rules, they must pay tax and National Insurance contributions as if they were employed directly, which is something not always transparent to HMRC with such disguised employment.
IR35 has often had a bad press in the two decades it has been part of tax law, with many experts saying it is poorly conceived and harms bona fide small businesses.
Now, IR35 is likely to be extended to the private sector with the aim of stamping out fraud and abuse of the tax system by individuals. HMRC had claimed that there had been an increasing number of people working in the public sector who are side-stepping the tax and national insurance rules by setting up one-person companies and are using this as leverage to bring the same legislation across all workers.
HMRC has hailed the public sector IR35 reforms as a success, due to the increase in claimed levels of compliance. For example, it places all workers, doing the same job, regardless of their employment status, in the same tax position. However, despite HMRC saying the roll-out to the public sector has been a success, it has still not published any figures on how much money it has recouped in lost tax and National Insurance contributions, but has stated that, this year, it expects to raise around £300m.
Despite this, we have found that most public-sector organisations see IR35 as an unwelcome additional chore and have looked towards a business partner such as 247 Time to help manage workforce compliance. Using this experience, we can sympathise with the many businesses who complain that the regulations are both too complex and ultimately harmful. Many companies owned by professionals, who often have many short-term contracts rather than one steady engagement are now paying income tax. This is especially poignant as many workers within Healthcare are paid by income generated by the taxpayer, but where seen not to contribute their own fair share of their income by using mechanisms that, resulted in them reducing their tax liability.
A new consultation to make sure that people who effectively work as employees pay the right amount of tax has been launched by the government. It says that evidence suggests that the taxpayer could be missing up to £1.2bn a year by 2023 because of people getting the rules wrong and incorrectly paying tax as if they were self-employed. The consultation will look at how to make these rules work better. The genuinely self-employed will not be affected, says the government. The consultation will close on 10th August 2018.
Despite the troubles that IR35 has wrought, it does have significant benefits - depending on your status, including: equal tax status for all workers; an increase in HMRC tax gain from those who previously, had chosen to avoid; a clearer definition of workers employment status; and those now employed enjoy the benefits that a full-time employee has.
Each industry will have its own IR35 Issues to contend with. While we don’t agree with some industry spokespeople that IR35 will “wreak havoc” in the private sector, we are able to help many clients, including those in the NHS Trusts to keep within the standards of compliance required by HMRC. We await the results of the consultation with interest.