Contracting in 2013 had more than its fair share of IR35 activity, particularly in the public sector. This was compounded by two late entries: the House of Lords Select Committee on Personal Services Companies (PSCs) inquiry and the proposed false self-employment legislation arising from the Autumn Statement.
More positively, contractor demand increased consistently throughout the year. New PCG-commissioned research highlighted that contractor numbers grew steadily, and government statistical data showed there may be more limited company contractors than previously thought.
IR35: office holders and the business entity tests
2013 started with an analysis of the then draft legislation to bring ‘offices holders’ inside IR35. Egos’ Roger Sinclair pointed out that, despite the media and government hype, the vast majority of contractors would remain unaffected.
More seriously, HMRC was using its new IR35 resources and the framework introduced during May 2012 to target public sector contractors and interims. According to Qdos’ Andy Vessey, this was a direct result of the 2012 Treasury review of public sector off-payroll arrangements.
Despite its efforts to apply its new IR35 framework, including the business entity tests and specialist teams, HMRC refuses to divulge the data that would show how effective the new framework has been, or whether it had achieved anything at all.
A ContractorCalculator survey showed that limited company contractors were most likely being incorrectly targeted by the new BETs. ContractorCalculator’s own online IR35 test showed that 31% of those identified as high risk by the BETs were in fact outside IR35.
HMRC’s FOI stonewalling
Repeated Freedom of Information (FOI) Act requests by ContractorCalculator, which started in May 2013, continue to be stonewalled by the taxman. HMRC has even so far refused to reveal the data released to the IR35 Forum.
Partial figures were published in December 2013 but HMRC has obfuscated the key data relating to the success of the BETs since 2012. The data mixes data from previous years with that relating to 2012-2013, which means it still does not show specifically how effective, or not, the new regime may have been since May 2012.
Public sector contractors and the off-payroll rules backfire
During September 2013, and based on information leaked from several sources, ContractorCalculator ran a series of articles exposing how the public sector off-payroll rules have spectacularly backfired.
UK contractors have been replaced by non-EU workers paying less tax. At the same time, poor guidance is driving out workers with essential skills from the public sector, critical public service delivery standards are being negatively affected and costs are spiralling.
The rules even stimulated a contractor exodus from the public sector, according to Qdos’s Seb Maley. This deprived government departments of key skills, and all directly as a result of the stress and hassle contractors suffer as a result of the ill-thought-out rules.
Contractor demand grows
More positively, surveys published during 2013 confirmed that contractor demand increased as the UK economy recovered. There was also evidence that there may be more limited company contractors than previously thought, and those numbers in the UK and across the rest of Europe continue to grow.
Surveys published during 2013 confirmed that contractor demand increased as the UK economy recovered
Throughout the year, leading labour market surveys, such as the Recruitment and Employment Confederation (REC)/KPMG Report on Jobs, the Bank of Scotland Report on Jobs, the Reed Job Index and REC’s JobsOutlook, all confirmed that contractor demand increased consistently throughout 2013.
Contractor numbers increase
A survey published in March 2013 by the Department for Business, Innovation & Skills (BIS) showed that there are over 800,000 one-person limited companies in the UK.
Previous estimates in PCG’s ‘Kingston report’ suggested that just over 150,000 contractors and freelancers defined themselves as ‘sole director of own limited company’. The BIS survey showed that the actual number may be much greater.
A major new study commissioned by PCG and the European Forum of Independent Professionals (EFIP) showed that contractor, or independent professional (iPro), numbers in the UK had grown by 63% since 2004. Across Europe, there were estimated to be 9m iPros, up 45% from 6.2m in 2004.
The Lords’ PSC inquiry
Despite the positive market news, the end of 2013 held some unwelcome surprises for the contracting sector. First was the start of the Lords’ select committee inquiry into the use of personal survey companies. The second, and potentially more damaging, was the proposed false self-employment legislation.
Over three sessions in the Lords, witnesses from HMRC and Office of Tax Simplification (OTS), professional bodies and academics and contracting experts delivered evidence.
In the first session, HMRC claimed that IR35 generated nearly half a billion pounds to the Exchequer as a result of its deterrent effect. Session two saw an accountant tell the lords that IR35 needs 3,000 inspectors if it is to be policed properly.
The most significant session by far was the third, which saw representatives from PCG, the Association of Professional Staffing Organisations (APSCo) and the Federation of Small Businesses (FSB) emphasise that using a personal service company is a legitimate form of trading and not a tax avoidance strategy.
False self-employment legislation proposals
The final main story of 2013 was the analysis by Roger Sinclair or Egos of proposed legislation arising from the Autumn Statement. He highlighted that all contractors using agencies would have income tax and National Insurance (NI) deducted at source via Pay As You Earn (PAYE) if the legislation goes ahead in its current form.
PCG branded the proposals to introduce a new test of self-employment alongside the existing employment status legislation and IR35 as “dangerous”. Fortunately, the proposals are just that, and the consultation stage may see the legislation amended so that limited company contractors will not be affected.
Contractors can read what 2014 may have in store for them in a series of predictions by contracting sector experts, including PCG’s Simon McVicker, Derek Kelly from Parasol and ClearSky and Seb Maley from Qdos.