Further to our previous article, there has been conflicting evidence recently as to the exact impact IR35 changes have had in terms of the roll out to the public sector back in 2017, and in relation to the extension of those changes to the private sector to businesses with 50 or more employees on the 6th April 2021.
IR35 Changes
A full explanation of what IR35 (aka the off-payroll working rules) is, is set out here and here.
The Government’s objective behind the IR35 changes was to clamp down on what is referred to as ‘disguised employment’, where those who are in reality employees are made out to be self-employed contractors, often using personal services companies as a vehicle, so as to avoid paying the additional taxes and national insurance contributions that come with being an employee.
Following the IR35 changes, those managed and directed in how they carry out their duties and responsibilities, and who use the equipment of those that have hired them, will be deemed to be employees and they must now go on to the PAYE payroll.
Nevertheless, Critics of the IR35 changes point to the problems encountered with the Check Employment Status for Tax (CEST) tool, widely regarded as defective, with 42% of assessments found to be inaccurate. Indeed, the Government has been humiliated 3 times over the last 6 months on account of IR35 failings by the Government’s very own departments and agencies, failings which have all been traced back to the deficiencies of the CEST tool.
Moreover, critics of IR35 argue that the changes have undermined the UK’s flexible economy, in that previously the use of contractors who could be taken on and let go as and when required, made the resourcing and implementation of projects more viable and manageable. This is no longer possible under the new rules, thereby making projects more expensive and risky.
The Public Sector
The IR35 changes were rolled out to the public sector on the 6th April 2017
A new report from the HMRC has stated that the long term impact of the IR35 changes has had a minimal impact upon the number of contractors used. The report found that 95% of central government bodies and 93% of sites still used contractors
For the period between March 2017 and March 2020, 72% of the sites and 48% of central bodies reported that there had been no change in the numbers of contractors they used. Where there had been a change in numbers, 14% of sites and 30% of central bodies stated that they had increased the use of contractors during the period, whilst 12% of sites and 23% of central bodies reported a decrease.
Nevertheless, some have been critical of the findings of the report, and they highlight the fact that no input was sought from contractors when compiling the report. Indeed, the CEO of IR35 Shield, Dave Chaplin, points out: "By not interviewing agencies and contractors, it’s rather pointless, because it does not reveal the full picture at all and does not provide the necessary cross-check to what the public bodies are saying."
Chaplin adds: "The elephant in the room for this survey is the complete lack of marrying up to the Government accounts recently published which demonstrated that many public sector bodies have ended up with a combined tax bill of circa £250m, despite using CEST and following HMRC guidance."
Moreover, the CEO of Qdos, Seb Maley, adds: "This study suggests the impact of IR35 reform in the public sector was minimal, despite there being plenty of evidence out there to contradict this. It even goes as far to say that nearly half of public sector bodies have not assessed any contractors inside IR35 whatsoever...I’m taking it with a pinch of salt – blanket IR35 determinations were commonplace in the public sector....The hundreds of millions in tax liability and penalties issued to government departments for non-compliance shows that the public sector wasn’t nearly well prepared enough for IR35 reform."
Furthermore, a new report published by the National Audit Office (NAO) confirms the fact that the public sector was not properly prepared for the IR35 changes. The report found that there had been insufficient time to prepare for the changes, a lack of appreciation for how long it would take to get to grips with the changes, and problems with the CEST tool. The NAO conclude that: "As a result, it was highly likely that some public bodies would make mistakes."
The Private Sector Extension Of The IR35 Changes
The IR35 changes were extended to businesses in the private sector with 50 or more employees on the 6th April 2021.
It was widely predicted that the extension to the private sector would be a disaster, and as we highlighted in a recent article from last December, new surveys have found that the IR35 changes through the extension to the private sector has indeed been disastrous for the economy
Firstly, a survey of 3,750 contractors by IR35 Shield found that 47% of the contractors reported that some of the firms that they had previously worked for had now completely banned the use of contractors altogether, 58% of the contractors divulged that some of the companies that they had once worked for had moved work abroad, and 35% of the contractors disclosed that some firms have completely cancelled projects altogether
Another report from the Association of Independent Professionals and the Self Employed (IPSE) found that 70.8% of contractors reported that the IR35 changes had been more damaging to them than either Brexit or the Covid-19 pandemic, and that 35% of contractors had abandoned self-employment altogether
It is hardly surprising that the IR35 extension to the private sector has been as disastrous for the economy as forecast. As the NAO report highlights, "HMRC estimates that the 2021 extension of the reforms will affect around 180,000 [personal service companies (PSCs)], almost four times the number affected by the 2017 reforms. This creates a bigger challenge for HMRC to identify and monitor risks of non-compliance."
