Employment law expert Adrian Marlowe has responded to reports from the BBC that the Treasury is finalising plans to extend controversial public sector IR35 reforms to the private sector by urging employers, recruitment agencies and contractors to prepare for the impact now, including the likelihood that it will prompt a big freelancer transfer from limited companies to umbrella companies.
The public sector has already witnessed a significant switchover to umbrella companies following the introduction of the reforms in the public sector last April, which have reduced the number of contracting professionals working outside IR35 via their own limited companies. Many, upon receiving an inside-IR35 determination, left the public sector altogether rather than pay employee taxes with none of the employments benefits they are intended to fund. Others chose to continue working flexibly in the public sector by switching to an umbrella company, which does provide all of the statutory employment benefits in exchange for paying employee-level tax and NICs.
Marlowe believes that, despite some speculation that the reforms will come to the private sector in April 2020, there is at least a possibility that they may arrive as early as April next year. There is cross-party consensus that clamping down on “tax avoidance” is desirable and the Treasury maintains that the public sector reforms have already raised large amounts of tax. This conclusion is hotly disputed by others, who claim that the figures do not take into account the cost of a large rise in non-compliance that the reforms have prompted.
Many professional voices representing the skilled contracting sector and the staffing industry have already urged the Government not to proceed with an extension of the rules, but it seems likely that the case against the reforms will be dismissed by the Treasury and HMRC. The Association of Recruitment Consultancies (ARC), of which Marlowe is the Chair, wishes to see the IR35 changes and the principles of HMRC’s online CEST tool brought back before the Treasury Select Committee to pick up on the serious criticisms of both, but this does not appear to be on the horizon currently.
Urging preparation for the reforms without delay, Marlow says: “There is no doubt that if the extension takes place there will be a likely shift of contractors to the umbrella sector, and relationships and relevant contracts will need to change. The combination of new IR35 rules and a greater dependence on service providers threaten to expose the unwitting to tax risk and AWR claims (see the recent Winchester case) amongst other things – a multiple source of risk for contractor agencies and hirers going forwards.”