How will IR35 affect private sector employers

IR35 or ‘off-payroll working rules’ became law in 2000 where it was introduced to crack down on freelance contractors that could take advantage of the tax benefits but were still considered an employee, aka ‘disguised employees’. This was to ensure they paid a similar amount of income tax and NI as if they were employed. Following the updates to this legislation in April 2017 in the public sector with mixed feedback many believe it is a case of ‘when’ and not ‘if’ this will impact the private sector too. 

Why is it changing?

Due to limited policing of the legislation, it didn’t quite have the desired effect and the HMRC’s tax receipts fell short of expectation. On the 6th April 2017 the way this legislation was enforced was changed, initially to those working within the public sector. This meant the employer would now be responsible for working out whether any of their contract workers were deemed employees, to operate inside IR35 and deduct the relevant tax. Public sector businesses were now faced with penalties for non-compliance, which now forced them to pay closer attention to the potential hundreds of contractors on their books.

How was the changes in the public sector received?

Contractors responded differently to the changes, but it essentially came down to three scenarios:

  1. Contractor accepts contract at a lower rate – Not good for contractor
  2. Contractor increases rate to cover loss of earnings to tax – Not good for client
  3. Contractor declines new contracts and leaves public sector – Not good for either

From an HMRC standpoint, the results were positive, but from a public sector business point of view, they witnessed talent leaving in droves and projects being delayed.

According to research by the CIPD, 51% of public sector hiring managers had lost skilled contractors as a direct result of the changes to IR35 regulations and 52% had witnessed cost rises, delays and project cancellations.

How will IR35 affect me as a private sector employer?

According to the HMRC, the cost of non-compliance in the private sector is high and projected to increase further from £700 million in 2017/18 to £1.2 billion in 2022/23. They estimate only 10% of contractors that should be deemed inside IR35 are currently compliant.

Therefore, it is thought that IR35 will be introduced into the private sector in an attempt to curb this, by putting the onus on the employer. However we are still unsure when this will be introduced or what it might look like, so all eyes are on the Autumn Statement on the 29th of October to more information on this. Expert opinion right now is that this could be April 2019 / April 2020 or beyond but it is thought that this is a case of “when” and no longer “if”.

Depending on how many contractors you have will depend on how this will affect you when introduced. If you use contractors as part of your workforce you may be affected in various ways such as:

  • Skill shortages: Contractor talent leaving the company because it’s no longer as lucrative, leaving holes in the talent pool.
  • Increased costs: To keep contractors you may be forced to pay them more to cancel out the extra tax they now have to pay. These increased costs can add up over time and cause projects to go over budget.

In terms of how contractors are likely to react, it’ll likely be similar to how they did before by either taking it on the chin and paying more tax, inflating their contract rate to cover any tax increase, or even leaving the contracting game altogether and becoming a permanent employee.

There are already uncertainties about how things will change once the UK leaves the EU, let alone with IR35 hitting the private sector and adding to the concerns. Some of the Brexit-related concerns such as lack of overseas talent might be exacerbated by IR35 as the number of candidates from the EU is already dwindling. Many believe a more sensible move would be to wait until Brexit has happened before bringing in new legislation for thousands of companies in the UK.

How will IR35 affect private sector employers