With crucial changes to how IR35 is applied in the public sector now just four months away, now is the time for public sector contractors to consider their position and think very carefully about the future.
This is the message from Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed (IPSE), following the publication of draft legislation confirming the most significant event in the 17-year history of IR35.
“It may be that some contractors simply decide not to work in the public sector ever again,” Bryce comments. “Some may seek to assure that they remain outside IR35. Others may decide to increase their rates to compensate for this unfair levying of tax. Either way, IPSE is on hand to offer contractors the necessary support they need.”
Public sector reforms are ‘potentially devastating’
The publication of the draft legislation comes less than two weeks after the reforms were confirmed in the Autumn Statement 2016. The announcement itself was preceded by staunch opposition to the changes from multiple contracting stakeholders in the form of consultation responses and campaigning.
IPSE was one of the organisations at the forefront of these efforts. Bryce notes that IPSE’s submission to the Chancellor made it very clear that the reforms were the wrong thing to do, and warns of the colossal damage they could cause:
“The reforms could have a potentially devastating effect on public sector contracting and will fundamentally shift the way in which people engage with the contract sector.”
Not only this, a substantial reduction in terms of contractor engagement in the public sector also looks likely, with Bryce warning of the threat of a contractor exodus:
“There may well be a migration away from the public sector as a result of these changes. Clearly, we can’t advise people on how they engage with their clients. But from the research that we’ve done, we’ve already encountered plenty of individuals who are unwilling to contract in the public sector. We believe there is a serious risk that this trend will proliferate as a result of the reforms.”
IPSE intent on supporting public sector contractors
Contractors who want to continue contracting in the public sector aren’t completely without hope. Whilst IPSE is still reviewing the draft legislation, Bryce assures us that it is taking steps to mitigate the impact on the UK’s contingent workforce.
“We still have to see the technical details of the legislation. But in the meantime we are taking legal advice and looking at how we can help our members who want to contract in the public sector.
“We are also examining ways in which we can help public sector bodies continue to engage contractors on a business-to-business basis, and we are fully committed to backing any contractors who are willing to test this legislation in the courts.”
Tax avoidance label unfair on contractors
The Autumn Statement itself was relatively quiet for the contract sector. Aside from the confirmation of the public sector IR35 reforms, the big news for contractors is that the VAT rate for many contractors using the VAT Flat Rate Scheme is set to rise to 16.5% in April 2017.
This is just the latest in a line of measures aimed at eliminating tax avoidance, and is targeted specifically at contractors. For Bryce, the Autumn Statement exemplified the Government’s somewhat misguided perception of the contractor workforce:
“I think that there was some good news in the Autumn Statement, although a fairly limited amount, and obviously this was vastly outweighed by the confirmation of the public sector changes.
“What we found particularly disappointing was that the only time the Chancellor mentioned self-employment, he mentioned it in connection with tax avoidance. We feel that Government needs to recognise that the vast majority of contractors are doing so because they want to be in business, and that they are not doing so as a tax avoidance mechanism.”
Employment review key to escaping ‘19th century tax system’
There is some good news for contractors. Two months ago Prime Minister Theresa May ordered a review of employment practices in the new economy, covering issues such as job security, pay and workers’ rights. The review has since been launched and is being led by former head of the Labour Policy Unit Matthew Taylor.
“It’s certainly a positive indication,” notes Bryce. “It at least shows that the Government is aware of the issue and is prepared to take the necessary steps to reveal the extent of the issue in order to find some solutions.”
Bryce confirms that IPSE will be working closely with Taylor on the review, and hopes that it will help to define more modern ways of working in the eyes of policymakers. This, he believes, is crucial to ensuring a shift away from the unfair association between the self-employed and tax avoidance, and a step towards a more welcoming policy landscape for the UK’s contractors.
“It’s a fundamental issue that we have a 19th century tax system that is not fit for purpose in a 21st century economy, and we’re hoping the Taylor Report will address that,” he concludes. “We’ll be speaking directly to Mr Taylor, as well as with the Treasury to try to help resolve the problems it has with the tax base.”