• IR35 could be extended into private sector ‘as early as spring 2018’

  • 13 Jul 2017
  • Comments 5 comments

Expansion would be complete disaster for contractors, businesses and Brexit, warn recruiters

The IR35 tax rules that have caused huge disruption for HR teams in the public sector could be extended into the private sector “as early as spring 2018,” recruiters are warning.

Amendments to the IR35 tax system for the public sector came into effect this April. Since then, public sector contractors have had their tax status determined by the organisations hiring them. Those deemed to fall inside the IR35 regime are treated as employees for tax purposes and have their tax and national insurance contributions deducted at source, resulting in significant pay cuts for many.

“It isn’t a matter of whether [the private sector extension] will be implemented, the question is when,” said Geoff Fawcett, director at recruitment company Hays. “It could be as early as spring 2018 but, with the current political landscape and the ongoing uncertainty, it might be pushed back until 2019 or later.”

Fawcett is not alone in this outlook. Crystal Umbrella reported that a straw poll of recruitment agencies at a seminar hosted by employment law consultancy Lawspeed revealed that most thought the tax rules would be rolled out to the private sector within the next two years.

Meanwhile, Crawford Temple, chief executive of PRISM, the trade body for umbrella companies, believes extending the rules would be “a complete disaster” – not just for contractors but also for the businesses that rely on their flexibility and expertise.

Temple told People Management: “As we negotiate our exit from the EU, it's imperative that the UK remains an attractive place to do business. Pushing this damaging legislation into the private sector will have a catastrophic impact.”

Julia Kermode, chief executive of the Freelancer & Contractor Services Association, warned that extending the regulations to the private sector may undermine flexibility in the workforce. “The gig economy has been widely credited with enabling economic recovery so far, so it is unthinkable that the government might be prepared to jeopardise this,” she said.

If the introduction of the rules in the public sector is anything to go by, Charles Cotton, performance and reward adviser at the CIPD, believes there is a risk for employers that “some contractors could ask for more money, though the ability to do so will depend on their skills as well as the ability of organisations to pay these higher fees”.

Lewina Farrell, head of professional services at the Recruitment & Employment Confederation, admitted that the full effects of IR35 remain to be seen, but that “anecdotes from members suggest that since the rollout some contractors have taken fixed-term or permanent roles rather than temporary ones”.

Research released in April by contractor tax specialists Qdos Contractor revealed that the public sector could face a mass “contractor walk out”, with 85 per cent of contractors surveyed threatening to stop working for the public sector if they were caught under IR35. Almost all (95 per cent) said the rule shake-up could plunge the public sector into crisis.

Meanwhile, an earlier investigation by People Management, published last month, discovered that some public sector contractors had chosen to temporarily freeze their personal services company or retire early rather than work within the IR35 rules.

HMRC had not responded to People Management’s request for comment at the time of writing.

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Comments (5)
  • As with many other elements of legislation flouting (read the recent reports of blatant sex discrimination in county councils, misuse of absence policies in police forces, and flagrant overspending and poor financial management in NHS trusts and local authorities) it is the public sector that needed the IR35 shakeup. 10 years as a contractor is par for the course in public sector, but rare in all but the largest private corporations, where projects and initiatives move at a slower pace, akin to the bureaucracy of the public sector.

    The private sector is very different - 99.9% of UK businesses are designated as small to medium enterprises (<250 staff) and most of these are micro businesses (<9 staff). Introducing IR35 to private sector across the board in an attempt to target less than 1% of businesses flouting the rules is like using a wrecking ball to thread a needle - completely damaging overkill on a massive scale. Why jeopardise the UK's fragile economy by punishing all private sector businesses for the few - that's just lazy! Surely it would be easier and much more efficient to simply target the large corporations and banking institutions that aren't following the rules and and audit them?

  • While contractors may ask for more money, it will be incumbent on the organisations using them to refuse and thus the market will adjust and charge a lower price.

  • Finally the treasury have won against the free loaders, Julia Kermode can spout all she wants, but companies have used contractors, in place of temporary contracts to avoid, ENI, holiday pay, sickness and pensions, these companies may have added extra compensation to certain contractors, but as the Uber and Deliveroo challenges have shown, 'self-employed' contractors, at this level, are not being overly compensated to take account of holiday or pension, thus leaving the state, if entitled to pay it if not now later when the person reaches a pensionable age without any pension savings.  I know of contractors who have been working for one company for over ten years, moving from direct employees to contractors and carrying out the same job, under the same managers being told what work to do and when to do it. This change is long overdue and will have Deliveroo and their ilk hoping mad, Jeremy really did win!

  • One of the side effects of the IR35 reforms in the public sector was that the lower paid contractors, clearly caught within IR35, moved to employment-based models, like PAYE umbrellas. They then get rights as Workers, and are no longer as 'vulnerable' as before where they may have been forced into false self-employment

    Given the Taylor report was very much focused on protecting these workers, then rolling out IR35 to the private sector would be a good way of solving some of the false self-employment issues.

    Dave Chaplin,

    CEO, ContractorCalculator

  • Why do we recruiters keep on about this when there's no actual evidence that it may happen? The more we keep repeating that it may happen in April 2018 or 2019 or whenever, the greater danger there'll be of it becoming a self fulfilling prophecy. As soon as HMRC thinks we're expecting it, the more incentive they'll have to push. Let's keep a low profile.