Off-payroll reforms misunderstood by the self-employed

There are calls from contractor and freelancer representatives for the off-payroll (IR35) reforms, due to be applied to the private sector, to be stopped.

Many UK sole traders are making plans to address the impact of proposed off-payroll reforms (also known as IR35) – where contractors must pay employment taxes without the equivalent of employment rights – even though the legislation will not affect them.

Not only are 18% of sole traders making unnecessary preparations for when off-payroll reforms hit the private sector in April 2020 but 13% of limited company contractors said they will stop contracting as a direct result of the planned reforms. This would be equivalent to losing 78,000 people from the contracting workforce, based on estimates of there being 600k personal service companies in the UK, carried out by the Freelancer & Contractor Services Association (FCSA) which undertook the research with accounting software provider FreeAgent.

The FCSA believes its research findings should be a warning to the Government that off-payroll reforms will put medium and large-sized businesses under continued pressure – ‘and that the UK economy cannot withstand another hit in an already tight labour market’.

It says firms are already struggling to fill their staff vacancies, as recorded in the Chartered Institute of Personnel’s Labour Market Outlook report and that a depleted contractor workforce able to support businesses in the short-term firms will not be able to withstand the loss of essential freelance skills and talent that they have been relying on to date.

The research also found:

  • 70% of limited company contractors believe the proposals are unfair on the self-employed;
  • 76% believe that all (68%) or some (8%) employment rights should be attached to an inside IR35 determination;
  • 36% will only work on an ‘outside IR35 contract’;
  • 13% would leave contracting (early retirement, seek a permanent role or work overseas) if the reforms come into play.

Julia Kermode, chief executive of FCSA (pictured above) said: “The fact that our research points to 18% of sole-traders who are making plans for the 2020 roll out of the reforms when they do not apply to them speaks volumes about the lack of clarity regarding the reforms.

“We made HMRC and HMT aware of the issue in our last consultation response which presented evidence that sole-traders were included in their stated “58,000 average monthly worker instances” captured by the public sector reforms.

“By definition, sole traders are outside the scope of IR35 legislation and therefore should not have been affected by the public sector reform, so their inclusion is a very serious error.”

Ed Molyneux, chief executive officer of FreeAgent said: “Freelancers and contractors are the driving force behind the UK economy and UK plc and with these planned reforms the Government is planning on penalising them and many of the companies they work with. Time and again policy makers continue to ignore the fact that the self-employed have none of the employment rights or the security that comes with permanent employment, and there must be some recognition for that. Currently, they are intent on crippling what is a very important and growing part of the UK economy.

“The complexity, unfairness and administrative burdens that the proposals will bring to supply chains are damaging to the UK economy, damaging to the flexible labour market, damaging to the recruitment sector and damaging to the workers it will impact. This latest research corroborates that. What’s more, our economy relies on the fact that companies can turn to talent on tap on an ‘as needs’ basis and with 13% of contractors considering turning their backs on this way of working under the new rules and with 36% stating they would only work on an ‘outside IR35’ contract it is little wonder that 70% believe the proposals are unfair.”

Kermode concluded: “Our research outlines the devastating impact of the proposals on contractors and UK businesses that are struggling to fill their vacancies, and the collateral damage to sole traders. Put simply, the evidence reinforces our view that the Government should not press ahead with its proposals and a delay is essential.”

The research follows another call for the reforms to be abandoned from Dave Chaplin, CEO and founder of , Contractor Calculator, which offers guidance to contractors and freelancers, who listed five reasons to ‘stop the off-payroll tax now’.

The proposals, he says:

  • Will cause damage to the UK economy and flexible workforce;
  • Breed tax avoidance and ruin lives;
  • Cause disruption and damage disproportionate to tax gain;
  • Restrict access to justice and breaches Human Rights;
  • Rely on CEST which is unfit for purpose and cannot be fixed before April 2020.

Chaplin says when the off-payroll rules were introduced to the public sector, for example in the NHS, the legislation has “wrongly took away self-employed status from tens of thousands of doctors and nurses, many of whom provide temporary and emergency cover for the NHS.”

ContractorCalculator says Freedom of Information evidence it obtained shows that 94% of workers are being assessed as ‘deemed employees’ which it says is contrary to HMRC’s intentions that the genuinely self-employed should not be affected.

IR35, Chaplin says “has always been a breeding ground for tax avoidance schemes, because it attempts to tax workers at higher tax rates than employees pay yet denies them workers’ rights. The new proposals do the same and run counter to the intentions of the Government’s ‘Good Work Plan’ which is supposed to prevent unscrupulous firms forcing vulnerable and low paid workers into precarious work.

“Tax avoidance schemes prey on the vulnerable workers, who cannot afford the large reductions in pay, and as we have seen, this results in catastrophic consequences such as the Loan Charge scandal which has hit the headlines recently.”

He adds that the off-payroll rules small companies exemption, allowing small companies to be exempt from applying the rules in the private sector, is at severe risk of being exploited by contractor clients in its current format, creating problems further down the supply chain. However, he warns that expected amendments to the rules could prove a barrier to company growth for some firms in the near future as companies seek loopholes to avoid the rules.

ContractorCalculator (CC) says the HMRC’s claim that the cost of private sector non-compliance with IR35 will reach £1.3bn by the 2023/24 tax year doesn’t align with projections from the Office for Budget Responsibility (OBR), that it is unclear where the £1.3bn estimate has arisen from, as it has not been certified by the OBR and that the OBR measures that the off-payroll rules are expected to net the Exchequer £661m in 2023/24 – ‘effectively half of what HMRC has claimed’.

Costs will rise CC says because when a firm assesses a worker as a “deemed employee” it is required to treat their income as salary, or employment income meaning that a firm must pay employers NI of 13.8% on top and an additional 0.5% for the Apprenticeship Levy or 14.3% in total, which it says companies can ill afford. Expenses which contractors won’t be able to offset for tax purposes will mean an increase in contractor rates.

For those contractors who travel and stay overnight for their work, their expenses will no longer be offset for tax purposes, meaning they will need to increase their rate further to compensate.

CC argues that HMRC’s proposals for a disagreement process, which is to be led by the client are not a proper appeals process and present significant obstacles which would likely prevent affected contractors from accessing justice via the court in a reasonable time. It says experts say there is no guarantee that a client-led process would resolve the difference of opinion and therefore, the proposals remove the contractor’s ability to challenge the decision before a tribunal and appears to fail to fulfil the requirements of both common law and the European Convention of Human Rights.

HMRC’s Check Employment Status for Tax (CEST) tool comes in for criticism: it has been the chosen status assessment solution for the vast majority of hiring organisations, largely CC says, due to assurances HMRC provided that assessments carried out using CEST will be less prone to scrutiny. But is says the use of CEST has ‘also coincided with a sharp uptick in contractors being assessed as ‘deemed employees’ and taxed accordingly, something HMRC has neglectfully attributed to heightened compliance with IR35 rules.’

Chaplin said: “Having a complex employment status test at the heart of the tax system hasn’t worked for 20 years under the intermediaries legislation and hasn’t worked under the new rules either.

“Firms are incapable of applying the rules consistently across the market, leading to market distortion and a tendency for firms to be more competitive if they are less compliant, leading to a breeding ground for tax avoidance. Certainty is required.

“If Government want firms to pay more when they hire the self-employed then it should simply introduce an off-payroll tax, of say 2%, that applies to all workers that are hired off-payroll. Government should finally put IR35 where it belongs – the bad tax bin. It must be stopped.”

Further reading: HMRC under fire over IR35 off payroll consultation

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Stephanie Spicer

Stephanie Spicer is an editor at Bonhill Group