A new Government report shows that employers do not support HMRC’s plans to shift the burden of IR35 enforcement onto public sector organisations.
HMRC believes that IR35 is not being operated effectively enough, and recently proposed changes to the way the rules are operated within the public sector. As announced in the last Budget, these changes are due to take effect from April 2017.
These changes include a controversial measure to make public sector employers responsible for determining the IR35 status of workers.
41 employers from both the public and private sectors took part in this new study which assesses the impact on employers if there were given the responsibility of operating IR35.
The results have been published in a new 14-page document, which you can download here.
According to HMRC, the research was conducted to “help us understand the impacts on employers and engagers if they were responsible for operating the intermediaries legislation. We also wanted to know what factors influence organisations to engage temporary staff.”
Contractors ‘deal with their own tax’
The main attraction of hiring contractors for most employers is in the flexibility they can offer an organisation. Temporary staff can help save money, and are perceived as ‘lower risk’ than taking on permanent staff. Contractors are particularly popular in certain industries where projects have a finite duration, such as IT, construction and design.
The study found that most employers had not considered the employment status of temporary staff before, including how workers were taxed.
This is unsurprising as another key attraction of using contractors is that they can be hired on a business-to-business basis, either direct, or via recruitment agencies.
And as a result, tax-related responsibilities of contractors have not, until now, been a concern for their clients.
There was a “common assumption particularly evident in smaller organisations that subcontractors will deal with their own tax and that this is in the ‘nature’ of being self employed.”
The report found that there was general resistance to the proposed changes in responsibility over who operates IR35.
Potential impact on employers
The main concern appears to be in the lack of flexibility for employers, and over having to take on another administrative burden, and the associated systems and costs associated with this.
Employers were also concerned that the proposed changes would lead to having to take on more staff overall, and offer employee benefits to workers who currently work on a purely contractual basis. Employers might be tempted to ‘err on the side of caution’ and take on more staff on a PAYE basis. Not good news for contractors.
Potential impact on employees
Although much has been made of the ‘tax benefits’ of working via your own limited company, many contractors choose to go it alone for the flexibility this way or working offers. The study notes that the proposed changes could force limited company contractors into employee-type roles – which may prove impractical – especially as many contractors may have multiple clients, for example.
Those employers surveyed also had privacy concerns; would temporary staff be comfortable revealing tax and personal data to clients, where currently such information is rarely disclosed?
Another IR35 test!
As has been the case since IR35 was first implemented over 16 years ago, the respondents wanted information and clarity over the new IR35 proposals.
There was particular concern over a new ‘supervision, direction or control’ test.
Given what is on offer at the moment, the study found that the participants welcomed a new, simpler test, as the current tests “were considered to be ‘ambiguous’ and open to interpretation.”
But, there was great concern over the accuracy of such tests.
As many employers pointed out, there was an overall consensus that the proposed new test would catch out most contractors, as most of them are under some kind of ‘supervision’ from end-clients to some degree.
Barely a year after HMRC was forced to shelve its much-derided business entity tests, it is hard to believe that the same organisation still thinks it is possible for an online test to provide a definite ‘yes’ or ‘no’ to a person’s IR35 status.
What happens now?
The proposals were not supported by the businesses which took part in the survey; the changes were perceived as being potentially costly, burdensome, and the shift of responsibility of applying IR35 would undermine the traditional relationship between clients and contractors.
And, given how confusing the proposed new rules are, many organisations would likely be cautious and take on less contractors in favour of traditional payroll employees.
One also wonders why private sector organisations were included in the study, when we have been told that the changes are only aimed at the public sector.
Commenting on the release of the consultation document earlier this year, Samantha Hurley, Operations Director at APSCo stated: “If these proposals are a dry run for the private sector then we fear for the whole future of the flexible workforce.”