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Off-Payroll: Tories facing crisis with tax reforms set to decimate flexible workforce

Government is facing a potential crisis with hundreds of thousands of contractors expected to abandon projects ahead of the 6 April private sector rollout of the Off-Payroll legislation.

This is according to a survey of almost 1,500 self-employed by inniAccounts and offpayroll.org.uk, which found that more than half of respondents intend to leave their clients, plunging projects into disarray. The study forecasts a resulting drastic economic impact that could outweigh HMRC’s business case for implementing the ill-conceived legislation.

  • 53% of self-employed to abandon clients before April 2020
  • £2.2bn immediate cost to the economy as a result of lost productivity
  • 91% of exiting contractors don’t trust HMRC’s stated policy
  • Just 9% of contractors have received an ‘outside IR35’ assessment from clients
  • 23% of contractors report being subject to blanket assessments by clients

“Though the figures are striking, they won’t be a surprise to anybody within the industry,” comments ContractorCalculator CEO Dave Chaplin. “Unfortunately, this fallout is a result of HMRC and Government’s failure to heed the countless warnings, or properly consider stakeholder input, during the legislation’s rushed implementation.

“The resulting damage to the economy will be the legacy left behind by former Chancellor Philip Hammond and Financial Secretary to the Treasury Mel Stride. Stride at least had the courage to postpone the private sector rollout for another year, although this survey shows that neither HMRC nor the affected businesses have taken advantage of the time permitted.”

Chaplin adds: “The question that now remains is will Sajid Javid and Jesse Norman take action to prevent the impending damage caused by the Off-Payroll legislation? Or will they succumb to the false rhetoric spouted by HMRC?”

HMRC and contentious status assessments cause contractor exodus

When asked about their most likely course of action, 53% of survey respondents stated that they intend to abandon their clients by the end of March. Meanwhile, a further 19% claim they will continue with their current client for the short term, while 4% plan on moving overseas.

10% claim they would take on a permanent role, many of whom intend to do so temporarily while they wait for the contracting market to recover. Critically, less than 3% of respondents intend to continue contracting with their current client for the long term.

Mistrust of HMRC and disputes over status assessments were amongst the key factors driving decisions by contractors to abandon projects:

  • 91% do not trust HMRC’s promise not to retrospectively investigate contractors
  • 85% have cash reserves to fund time away from contracting
  • 44% have undertaken status assessments contradicting a client’s ‘inside IR35’ determination
  • 77% believe the contract market will recover, enabling them to secure future work outside of IR35

“Whereas HMRC has failed to adequately prepare businesses for the impending changes, contractors have clearly taken pre-emptive measures,” says Chaplin. “Considering HMRC’s conduct throughout the Off-Payroll consultation phase, and the reports of widespread blanket assessments, the reasons why so many are ready to walk are unsurprising.”

“Taking the stance that contractors will stay on your terms because there is no alternative is short-sighted,” notes James Poyser, CEO of inniAccounts. “The majority of contractors are engaged in project delivery so they are well aware of the impact their decision to leave will have on the business and they are not afraid to vote with their feet and let it happen.”

Off-Payroll non-compliance by clients is already widespread

Status determinations have proven a key point of contention even before the rollout of the legislation to the private sector. There have been widespread reports of hiring firms conducting blanket assessments in breach of the Off-Payroll legislation’s ‘reasonable care’ requirement, while the taxman’s Check Employment Status for Tax (CEST) tool has been exposed as not fit for purpose.

And although HMRC has publicly stated that it believes roughly two in three contractors should be found outside the scope of the rules, only 9% of survey respondents were deemed ‘outside IR35’ by their client.

Meanwhile, 21% have received assessments determining them ‘inside IR35’, whereas a further 23% have been banned from engaging via their limited company by their client, without having undertaken a status assessment. Remarkably, with less than two months before the private sector rollout, 28% of respondents are still waiting to find out their deemed status.

Widespread non-compliance amongst hiring firms is evident. Despite being a legislative requirement, only 13% of respondents reported that they had been provided with a Status Determination Statement (SDS) by their client. Of those deemed ‘inside IR35’, 23% have been told that they cannot challenge their status, indicating abuse of the provisions for a ‘client-led status disagreement process’.

Economic damage set to outweigh Off-Payroll yield

With the legislation yet to be implemented, the impact on business is already being felt. When asked about their current projects, contractors reported a number of issues spawning from the Off-Payroll legislation:

  • 59% reported missing deadlines for delivery
  • 17% missed regulatory deadlines
  • 25% received late delivery penalties
  • 11% of projects were postponed
  • 4% of projects were cancelled altogether

Cross-sector comparisons are largely consistent. 61% of contractors operating in the finance sector and 74% of contractors in aerospace and defence have witnessed projects at risk, respectively. As a result of these struggles, 47% of contractors have already seen roles being offshored.

Feedback gathered from project managers responsible for delivery paint a similar picture:

  • 52% think more self-employed are leaving than expected
  • 85% believe mitigative measures taken aren’t sufficient to deal with risk of leavers
  • 44% believe the scale of impact is not yet apparent to the SMT/C-suite

However, the scale of the impact won’t remain a mystery for much longer, with inniAccounts forecasting a £2.2bn productivity gap during the first half of 2020 resulting from the turnover of self-employed. This calculation is based on the estimate that more than half of the UK’s 500,000 contractors and consultants will leave projects in the coming weeks.

“HMRC estimates that IR35 reform will generate an income of £1.2bn for 2020/21. But it’s clear from the scale of departures that the cost of blanket bans and unfair assessments far outweighs the business case HMRC argues,” highlights Poyser.

“The OBR flagged Off-Payroll tax uplift uncertainty as ‘very high’ and we believe the macro-economic impact of the behaviour we are witnessing has not been accounted for. The legislation is fundamentally flawed and rolling it out will have grave implications for UK PLC and the lives of hard-working skilled people.”

Abandon proposals or risk mass strike, Government warned

The survey shines a light on a number of glaring holes in HMRC’s impact assessment, less than a week after the House of Lord Finance Bill Sub-Committee announced an inquiry into the Off-Payroll extension due to similar concerns. For Chaplin, the findings leave no doubt about what should happen next:

“This research clearly demonstrates that the draft legislation is not fit-for-purpose. Firms are unable to cope, and contractors are not prepared to be unfairly treated. The fact that 85% of contractors can afford to bench themselves, and that over half are planning to abandon their existing clients, speaks volumes. There is about to be an unofficial strike by quarter of a million workers, and the impact on productivity for all firms that currently rely on them will be immense.”

“With fewer than eight weeks to go before the legislation goes live, there is simply no time for HMRC to fix the mess it has created. There is only one option left for Ministers, abandon the proposals.”

Published: 11 February 2020

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