IR35: A change contractors can't afford

By Harry Fone, grassroots campaign manager

A fortnight ago, in light of the coronavirus crisis, chancellor Rishi Sunak postponed this year’s planned IR35 changes by 12 months.

IR35 is designed to clamp down on contractors who are an employee of a firm in all but name. However, its introduction has been widely criticised and will possibly create more problems than it solves.

Contractors are typically people with specialist knowledge who are used by both the public and private sectors. They are brought in to help with a specific project, for example, helping to ensure firms adhere to new financial regulations.

It is a very useful arrangement for both organisations and contractors, providing a healthy supply of labour to the market. Contractors will often set up limited companies to reduce their tax burden and protect themselves against financial risk.

To get a full sense of how the changes will impact workers and companies alike, I recently interviewed a contractor in the financial services industry about the legislation.

Harry: What does IR35 mean for contractors? How will it impact you personally?

Contractor: The planned changes have already had a huge impact. The market for contractors has dried up significantly in the last 6 to 12 months. Companies have chosen to make blanket decisions affecting all contractors rather than taking the intended approach of genuinely reviewing individual roles to determine whether they fall in or out of IR35.

My firm found it difficult to make an informed decision due to the lack of information available and waited until the last possible minute to determine their approach, creating job uncertainty for me. A majority of firms in the sector were more concerned about a potential fine for a wrong decision rather than fully exploring the best course of action.

All contractors were moved onto a PAYE contract but with none of the employee benefits associated with payroll. This means contractors are now disadvantaged as they are treated like employees for salary and tax but do not receive pension contributions, sick pay or any of the other associated extras of employment.


H: Do employers welcome IR35?

C: A source of contractors provides flexibility for employers to ensure key projects can be undertaken without increasing the headcount in perpetuity. IR35 means that employers will now be responsible for deciding whether a role is in or out of the scope of the legislation. They are running scared from HMRC for fear of getting it wrong and contractors are already leaving the UK for opportunities elsewhere.


H: How has HMRC handled the introduction of IR35?

C: There has been a lack of information from HMRC meaning contractors and employers are unsure what approach to take. Neither want to be liable to a fine. Contractors and now employers are meant to rely on the Check employment status for tax (CEST) tool. Unfortunately, this has proved unreliable when determining whether a role is in or out of the scope of IR35.

Both firms and contractors are worried about retrospective investigations by HMRC based on previous experience, most notably the loan charge scandal.


H: What about those who say, “you’re just trying to avoid paying tax”?

C: It’s true that as a self-employed contractor, you will pay less tax, but this is offset by the considerable risk you take on. This is highlighted by the current circumstances. Those of us without permanent employment do not enjoy typical full-time employee benefits such as sick pay, holiday entitlement, maternity leave and overtime pay. Furthermore, employees working at a similar level to me would expect a three month notice period, I only receive a paltry two weeks. 

It’s also worth remembering that there isn’t necessarily a full-time role available. I am hired to bring my expertise to specific projects with an average timescale of just 12 months. Once that ends I may well be unemployed for several months before another role comes up.

It’s not just about tax, it’s a more specialised and flexible form of work which many people at all levels are looking for. IR35 is going to be terrible for us. 


H: The chancellor has postponed IR35 for 12 months, what should happen after that?

C: As part of his election promises, the former chancellor Sajid Javid promised a proper review of IR35. Following the Conservatives’ election victory this just became a review of how to implement IR35, which is significantly different.

The Tories should honour their election promise properly and undertake a full review of IR35 before it is rolled-out fully in the private sector. Ultimately, IR35 will see a  pool of “ready-to-go” workers lost and hit many SMEs very hard. The government should be wary of unintended consequences, not least after this crisis at just the time when self employed contractors will be trying to get back on their feet.


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