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Contracting in 2017: tax reform needs much consideration, warns IPSE chief executive

The Government needs to avoid adopting a haphazard approach that causes further damage to the contract sector as it looks to restructure its tax system in 2017.

This is the warning from chief executive of the Association of Independent Professionals and the Self Employed (IPSE) Chris Bryce as contractors embark on a year that looks critical in determining the future of taxation for the self-employed

“The world has changed radically over the last ten years - the way people work, the gig economy and contracting in general – and I think the Chancellor is in a position where he has no option but to look at the bigger picture before deciding on any structural change.”

Chancellor’s tax reform requires considered approach

In his Autumn Statement last November, Chancellor Philip Hammond acknowledged that technological progress is changing the way people work - and that the tax system needs to keep pace.

He also flagged plans to review the tax system following the Treasury’s estimations that the cost of reduced national insurance contributions (NICs) for the self-employed increased from £3.2bn to £5.1bn for the 2016/17 tax year.

Self-employment has become a prime focus for Government and relevant stakeholders this year, with no fewer than seven reviews in progress. Bryce isn’t surprised:

“Obviously there is a growing problem for the Exchequer with the tax base being reduced because so many people are becoming self-employed. So I understand their issue. However, whilst it’s probably a good thing that they are paying attention to this, I do wonder if their approach isn’t a little haphazard and a matter of shifting chairs rather than a wholesale review.”

Government encouraged to hold fire and await recommendations

With a whole host of policy recommendations expected as a result of the reviews, Bryce urges the Government to hold fire until more is understood:

“We still have a tax system that was designed largely in the 19th century, but we’re living in a 21st century world with 21st century working practices. This needs to be addressed urgently, but the Government is better off waiting for the conclusions drawn from numerous ongoing reviews prior to considering a wholesale reorganisation of the tax system.

“The ideal outcome would be for the Government to await the outcome of each review and cherry pick certain recommendations to hopefully come up with a more holistic system that works for contractors and the UK’s working population as a whole.”

He adds that IPSE will be responding to any consultation and will put arguments and suggestions to Downing Street in the coming weeks.

IR35 reform could serve as wakeup call for Government

Another major talking point in 2017 is the reform to IR35 in the public sector. Bryce confirms that IPSE will be publishing documentation in the next couple of weeks advising contractors who want to remain in the public sector, but adds that public sector clients will need to give the changes just as much consideration:

“Obviously with the decision for determining IR35 status moving to the client, they will be risk-averse. However, the cost to the client will be sufficiently higher for engaging contractors on an inside-IR35 basis and I expect many public sector clients will revise their own internal processes and working practices.

“So it’s not all doom and gloom. There will always be the need for contractors in the public sector, and this regime may just serve as a wakeup call for Government and policymakers to realise how important contractors are.”

Can public sector contractors claim rights inside IR35?

For contractors who have no choice but to accept an inside-IR35 contract, compensation could potentially come in the form of certain employment rights.

Bryce notes that contractors considered caught by IR35 under the new regime may fall under the definition of ‘workers’, who can legitimately claim certain rights, including holiday pay.

“It’s too early to say at this stage but it is something that IPSE is exploring. Interestingly, the reform, whilst forcing contractors to pay tax like employees, does not acknowledge the associated rights or benefits. IPSE is actively pursuing legal advice on whether that is acceptable.”

Will contractors benefit from Brexit?

Six months on from Britain’s decision to leave the EU, the UK is faring better than expected. December’s Purchasing Managers’ Indexes (PMIs) indicated strong momentum across the board, whilst demand for contractors has also risen of late. Whilst Bryce points out that poor Brexit negotiations could stunt this recovery, he adds that contractors may benefit either way:

“From a contractor point of view, the turmoil caused by Brexit could actually prove quite productive. There will be a requirement for large scale work on the implementation of Brexit both in the UK and the EU, and as we enter into negotiations and trade agreements with EU countries there will be an uptake in the amount of work required to implement those. So, in the immediate term, Brexit might actually provide quite a good opportunity.”

Contract sector growth points towards positive outlook

The UK almost reached historical highs of self-employment towards the end of 2016, with the contract sector showing no signs of slowing down. Bryce says it might be unrealistic to expect growth to continue at quite the same rate in 2017, but adds it should remain strong, for one reason in particular:

“Ultimately, people enjoy contracting. It gives them the flexibility and freedom to do the work they want to do, where they want to do it and how they want to do it. The allure of that is stronger than any uncertainty or feeling of persecution that comes from what is happening at the moment.”

Published: 10 January 2017

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