The chorus of disapproval from accounting and tax experts continues over Chancellor Phillip Hammond’s budget decision to impose public sector-style IR35 reforms on the private sector, Director Of Finance magazine reports, with warnings that they will drive accountancy costs for processing contractor payments up by 10%.
Under the new rules, all medium-sized and large private businesses will, as of April 2020, become responsible for determining the employment status of all the limited company contracting professionals they engage. Small businesses will be exempt, although it is not yet clear precisely how they will be defined.
On Monday, directly after the budget announcement, Julia Kermode, CEO of one of Britain’s largest umbrella company trade associations, the Freelancer and Contractor Services Association (FCSA), warned that the reforms will inevitably generate “an exponential proliferation of tax avoidance schemes”, as had already happened in the public sector after the rule changes were imposed there in April 2017.
Mike Cherry, Chairman of the Federation of Small Businesses, called on the government to carefully consider how this potentially destructive reform should be managed.
Dave Chaplin, the CEO and founder of ContractorCalculator, an online news and support portal for contracting professionals, said that once the true impact of the reforms on the public sector becomes visible, he anticipates widespread evidence of their unintended consequences, including damage to public sector projects and the contracting professionals themselves and increased costs, which he believed would combine to result effectively in a net loss.
He added: “While the fiscal impact of the reform for the taxman is still unknown, one certainty is that a private sector rollout will prove incredibly costly for UK firms.
“For a government that claims to be pro-business, this extra tax will slap an additional 10 per cent onto the cost of hiring flexible workers for growing businesses that are unable to afford full-time workers.”
The new rules, he said, were “ill-conceived” and will prove immensely damaging to the British economy.
Meanwhile, the founder of cloud-based accountancy form Pandle, Lee Murphy, told Director of Finance that the reforms will not only increase business costs but will also hit freelancers.
He cited the example of skilled, self-employed IT contractors who would currently earn a typical annual income of £50,000. At present, they would take home £43,670 after deductions of tax, NICs and other costs. After IR35, many will seek to continue working flexibly via PAYE umbrella companies, whereupon they will see their income slashed to £37,696 due to increased tax and NICs.
The upside, however, is that these umbrella contractors will receive all of the statutory employment benefits enjoyed by their salaried counterparts.