Public sector IR35 – a test run for the private sector?

With everyone’s attention firmly set on the April 2017 public sector IR35 rule changes, many within the industry have been asking whether this is merely a test run for a much bigger target – the private sector.

The question has been asked many times, ever since HMRC first published a discussion document on the Intermediaries Legislation in July 2015. This was the first step towards the implementation of the public sector off-payroll rule changes.

But now that the public sector changes are definitely going ahead (there was always a small chance that the Government might have performed a u-turn), will HMRC now pursue an even more ambitious plan – to extend the rules to the private sector?

No official plan to extend IR35 to the private sector

Unsurprisingly, the ‘official’ answer to this question is ‘no’.

Responding to a written question from Tulip Siddiq MP earlier this month, Financial Secretary to the Treasury Jane Ellison said: “The Government has no current plans to extend these changes to the private sector, but keeps all taxes under review.”

However, there are a number of reasons why the Government may see the private sector as an obvious target.

a) As the Chancellor demonstrated at the recent Spring Budget, the Government is keener than ever to make all workers pay broadly the same percentage of income as tax – regardless of their circumstances. See this popular article – ‘The ‘perks’ contractors have to pay for, but employees take for granted’ for our extended views.

b) Successive governments have been relentless in their appetite for maintaining the IR35 status quo, despite the flaws which exist in the way the legislation is operated. Take the recent IR35 Employment Status Service (ESS) tool, for example. It simply can’t provide accurate results which can be relied upon by those using it.

Despite this, and all the uncertainty caused by IR35, there is not a hint of the Government backing down.

c) Why would private sector contractors be treated differently from public sector contractors in the future?

d) There will be little sympathy from the public or the media should contractors be targeted in this way (unlike the ‘self-employed’ following the recent Class 4 National Insurance storm).

“There would be a huge backlash”

We asked some colleagues who, like us, have followed IR35 since its inception, what their views were on this topic…

Seb Maley, MD of Qdos said that concern was understandable, but given the mess that the current public sector implementation has ended up in, it seems very unlikely that an extension will be announced in the short-term.

“Right now, these are rumours, sparked by a Government document stating that the ESS Tool – used to set IR35 status – will be available for private sector companies to use. But it would be irresponsible, not to mention damaging for the entire contractor workforce, if an announcement was made any time soon. There would be a huge backlash.

“The industry is apprehensive enough about incoming IR35 reform, with public sector bodies and recruitment agencies uncertain, and largely unprepared for the change.”

“It’s not a case of if it will happen, it is a case of when”

However, Dave Chaplin, CEO of ContractorCalculator, says things might be different once the public sector hurdle has been tackled.

“Once the dust has settled after the changes in the public sector, and despite the utter chaos caused by HMRC, I fully expect them to claim success based on some spurious measure of tax receipts. This will be in spite of the damage done to projects by the exodus of the best talent and the increases in fees paid to contractors who stay and by large consultancies that charge more to fill gaps left by contractors.

“The stark reality is that we cannot have a two-tiered system, and if the rules only apply to the public sector they will be at a distinct commercial disadvantage. It’s not a case of if it will happen, it is a case of when. There’s every chance it could happen in April 2018.”

Public sector IR35 is a “pilot project”

Gerry McLaughlin, MD of IT Contractor, agrees –

“Some contractors don’t believe that these IR35 changes will be rolled out in the private sector too.

“It begs the question, ‘If the Chancellor and Prime Minister don’t believe it is fair in the public sector, why would they think it is fair in the private sector?’.

“The low amount of money (in tax terms) that they expect to get from their public sector changes, £185 million, seems to suggest that this is a pilot project.

“Also, the Chancellor has a hole of £2bn in his budget after reversing the NI changes. He said he will claw this back in his Autumn budget. Rolling this out in the private sector would more than cover his budget hole – and hit those people that he tried to hit with his NI changes, i.e. the self-employed and those who incorporate.”

Most contractors believe the private sector is next

The pessimism expressed by these industry ‘old hands’ is shared by the contracting population at large.

A recent poll by recruiter Harvey Nash showed that 82% of contractors polled believe that the upcoming changes will affect the competitiveness of the UK’s public sector, and 60% think that the changes will be rolled out to the private sector in future years.

Interestingly, 80% of HR professionals surveyed expect the rules to be extended in the future.

Given the mess the current planned implementation is in – we can only hope that the Government sees sense.

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