Six weeks before the private sector extension of the Off-Payroll Tax, new Chancellor of the Exchequer Rishi Sunak holds up a naked flame. With one fell swoop on 6 April 2020 he could reduce the UK’s flexible workforce to ashes.
The worrying thing is this analogy is scarcely an exaggeration. A recent survey of almost 1,500 self-employed by inniAccounts found that 53% intend to abandon their clients ahead of April 2020. 85% of whom have cash reserves to fund time away from contracting and are happy to do so for numerous reasons, including grave mistrust of HMRC.
If effectively half of the UK’s flexible workforce are to down tools in advance of the Off-Payroll Tax, how many will follow suit when the legislation’s full effect is realised? Arguably more importantly for the Conservatives, how will their would-be clients fare?
PM’s track record makes grim reading for contractors
PM Boris Johnson has form when it comes to forcing an issue irrespective of the facts. Think the Vote Leave campaign and the infamous claim that exiting the EU would leave the NHS £350m better off per week. This is a falsehood that his ego has apparently rendered him unable to hold his hands up to, almost four years on.
The good news is the Off-Payroll Tax isn’t his making, and somebody of Boris’ character would appear far more inclined to acknowledge the wrongdoings of his predecessors rather than his own.
Of course, this shouldn’t be the primary motive for scrapping the Off-Payroll Tax. It would be an incredible blunder for the so called ‘party of business’ to introduce a measure that diminishes access to flexible workers, damages businesses, and encourages the offshoring of work, hampering the economy. Yet, here we are.
A lose-lose situation for business, contractors and Government
HMRC’s Off-Payroll impact assessment claims that the effect of the legislation on firms will be ‘insignificant’. This is a ludicrous claim when you consider that the new employment tax liability alone increases the cost of hiring an ‘inside IR35’ contractor by 14.3%. Even more so when you bear in mind the only way for companies to entirely negate their tax risk while continuing to engage their contractors for the same outlay is to reduce their contract rates by 25%.
Inevitably, contractors are voting with their feet. We are encountering highly skilled contractors who have been out of work for as many as six months, for the first time in over a decade.
Many firms are faced with the same dilemma – increase expenditure on contingent labour or lose crucial flexible workers, leaving projects in disarray. Unfortunately, many don’t view the alternative – which is to assess engagements and offer ‘outside IR35’ contracts where fit – to be a viable option.
This stems from concerns over the long-term tax risk building up on company balance sheets. The risk is a ticking time bomb which would cause any prospective buyer to balk at investing in the firm in question.
It’s also a matter which isn’t aided by HMRC’s track record for retrospectively penalising taxpayers. The Loan Charge has served to reinforce suspicions of the taxman, while Government’s failure to put into statute HMRC’s promise not to use the Off-Payroll Tax to target contractors for historical engagements has further encouraged contractor walkouts.
Meanwhile, with contract vacancies unfilled and projects on hold, we are already witnessing the offshoring of work. This is not good news for the Treasury. The outcome of the Off-Payroll Tax for all is a lose-lose situation.
Time remains for Tories to blow out the match
This new tax on businesses divides opinion within the Conservative party. Aside from those who have been duped by HMRC’s misinformation, we know of a group of Tory MPs who oppose the legislation entirely, and who are lobbying the PM and Chancellor not to go ahead.
The discontent was significant enough for former Chancellor Sajid Javid to commit to a review of the proposed changes, formally announced last month. Javid was out the door shortly thereafter, having defied the PM’s orders to sack his Treasury advisers.
Will new Chancellor Sunak display his own sense of resolve by questioning a decision that has been calculated could damage the UK economy by an initial £2.2bn? Or has Boris simply promoted Sunak because he believes him to be more subservient?
The Tories have doused the UK’s flexible workers in petrol, but it’s not too late to blow out the match. Make the right decision, Rishi.