HMRC can’t police IR35; contractors routinely ignore it and the limited company contractors in the civil service issue has highlighted that abuse of IR35 is potentially widespread. But there’s now the possibility of a knee-jerk reaction by ministers to rush through legislation to close a tax loophole that that has already been closed by tax law. And the possibility that a new law would make clients responsible for IR35 enforcement could be a disaster for contractors and a body blow to UK plc.
From a simplistic ministerial perspective, making clients responsible for identifying disguised employees and taxing them accordingly is quite a neat solution. For example, in the case of Ed Lester, if the Department for Business, Innovation and Skills (BIS) had been charged with enforcing IR35, it would be likely to err on the side of caution and introduce a blanket rule covering all BIS workers. In other words, every legitimate limited company contractor would be treated as if they’re inside IR35 and taxed accordingly.
That could mean that some ‘forced disguised employees’ might try to claim employment rights, because BIS would be acknowledging that it only hires employees. The cost of providing those employment rights, and the lost flexibility that contractors bring BIS, would defeat the objective of BIS hiring them. And what genuine contractor would sign up to pay tax like an employee and receive no rights in exchange? BIS would clearly find hiring good quality contractors a challenge.
But what about the reaction of private sector employers made responsible for policing IR35? At one end, we have big clients like the banks, energy and oil and gas firms, retailers and so on. They might also introduce blanket rules on not hiring limited company contractors, because of the uncertainty of determining employment and therefore IR35 status, and only hire on a fixed-term employment contract basis. A third of the UK’s IT contractors working in the financial sector could see their incomes slashed overnight, because clients aren’t likely to pay more.
At the other end of the scale, small to medium sized enterprises (SMEs), which are becoming increasingly heavy users of contractors and freelancers, suddenly have a massive compliance burden. SMEs have gravitated towards using contractors because they can’t afford the compliance burden of employees. Forcing the burden of IR35 compliance on the SME sector would render large swathes of it uncompetitive overnight.
Tax practitioners and employment law experts agree that IR35 was itself poorly conceived, ill-thought-through and badly implemented in law. Now new knee-jerk legislation in whatever form it takes by ministers wanting to be seen by the public to clamp down on a non-existent problem would only make the situation worse.
It would be a disaster for contractors and, more importantly, it would be a disaster for UK plc, eroding the value of one of the genuine sources of competitive advantage the economy has to secure economic growth and recovery.