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Contractors will no doubt be ushering a sigh of relief this morning following the Autumn budget announcement. Despite predictions and much speculation around IR35 reforms, Phillip Hammond did not pull tough new measures for the flexible working market in his budget. Instead, he announced a series of consultations and discussion documents into off-payroll working in the private sector, planned for publication next year.
An extract from the budget document:
3.7 Off-payroll working in the private sector – The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. It is right that the government take account of the needs of businesses and individuals who would implement any change. Therefore, the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018.
The reforms introduced into the public sector in April 2017 have caused a veritable storm, with delays and project cancellations as contractors, aware of the risk of being incorrectly classified as ‘inside IR35’, have opted out of working for public sector bodies. Not surprisingly, the public sector has lost valuable talent, which has exacerbated certain skill shortages. On the other side of the coin, the chancellor insists that the changes have achieved the objective of increased compliance in the public sector, with an additional 90,000 contractors added to the payroll of public bodies in the three months from April to June this year.
Historically the contractor has been responsible for evaluating their IR35 status for each project. With the reforms, already in place for the public sector, the onus has now shifted to the client to carry out an IR35 assessment and make the appropriate tax deductions. Where a contractor is engaged via a recruitment agency, the agency is responsible for deducting tax via PAYE if the contractor is judged to be caught by IR35. Any non-compliance identified by the HMRC now falls strictly in the lap of the agency or client, resulting in back-dated tax and financial penalties. This shift of responsibility makes clients and agencies more likely to consider a contractor ‘caught by IR35’ to avoid any risk of misclassification and subsequent penalties. This is hardly reassuring for contractors whom might consider it is not in the client or agency’s interest to give a fair IR35 assessment.
Whilst the government acknowledges the complexity of the issue, the government is due to publish a discussion paper, forming part of the response to the Taylor Review of Modern Working Practices, with the aim of bringing greater clarity to employment status and tax. There is some reassurance to stakeholders that the government will work closely with them and carefully consider any possible changes. The Taylor review recommendations include;
One clear message from Nov 22nd budget, and good news for contractors, is that the government are more concerned with large corporations circumventing their tax liabilities using offshore structures than where contractors sit in employment structures and their subsequent tax position. At least the flexible working market can rest easy until next year and concentrate on the job in hand.