News and opinion

Tightening public sector IR35: Bad for micro-businesses


    The Government is proceeding with the plans announced in Budget 2016 to change IR35 rules in relation to those working for the public sector.

    In a nutshell, the Government plans to shift liability from the contractor (in the form of a Personal Service Company) to the engager - whether that’s a government department, agency, or consultancy working for the public sector.

    We believe these changes will have a negative impact on the micro-business community and are likely to be extended to the private sector next.

    HMRC are currently running a consultation on the proposals, which closes on 18 August 2016.

    On behalf of the 23,000 micro-businesses in Crunch Chorus, and our 9,000 Crunch Accounting clients, we have submitted an extensive response to HMRC.

    IR35 Guide

    Summary Position

    The proposals for IR35 set out in the 2016 Budget and this consultation represent a very significant extension of how IR35 works in practical terms. We believe this presents significant logistical and policy challenges that will have negative impacts on public services, flexible workers, and micro-business owners.

    We also fear this is just a staging post to similar expansion in the private sector, which would similarly have major negative consequences for workers, those hiring them, and micro-businesses in general. The ‘chilling effect’ such broad new restrictions will have on micro-businesses and their potential clients should not be underestimated.

    These proposals are likely to lead to a shortage of worker supply due to higher engagement costs, which will lead to higher prices for the public sector, thus overriding any benefits drawn from the hoped for boost in tax revenues.

    While we agree that disguised employment is not desirable and can lead to unfair outcomes as well as possibly lower tax revenue, we believe that the solution lies in a more significant change to tax and welfare systems to reflect the nature of modern business practices.

    Support the principle of fairness

    We recognise the Government’s desire to ensure fairness in the tax system so that people doing equivalent work are paying broadly equivalent levels of tax. We also understand the desire to ensure that rules aren’t unfairly exploited.

    However these proposals, if applied as set out, will lead to workers paying full National Insurance like an employee without having any of the rights and protections an employee can benefit from. This doesn’t feel like fairness to us.

    Current rules are too complex

    The current IR35 rules are too complex, forcing most businesses to seek professional advice just to understand if they may be falling under IR35. The proposals as they stand would result in making the situation more complex with significant practical differences for those with public sector clients.

    A significant re-imagination of tax and welfare rules should be the primary goal to resolve tensions in the flexible workforce. Meanwhile, until such major work can be completed, we propose that the IR35 legislation should be amended to define a small number of clear tests.

    These tests should mirror the current case laws in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968. We believe that these tests should be in plain english, avoiding jargon, so as to be understandable for all readers.

    They should cover:

    • Personal Service - Can someone else do the work?
    • Control - Does the engager control how the work is done?
    • Mutuality of obligation - Can either party walk away from the engagement?

    Pushing liability on engagers will disadvantage micro-businesses

    We are concerned with the suggestion of making the engager decide if IR35 applies. We believe such a change would result in engagers seeking to diminish their risk by hiring larger firms rather than one-person micro-businesses, who will be considered a higher IR35 risk by potential engagers.

    In our view, simpler and clearer rules would be the best way to improve compliance, ease inspection, and reduce uncertainty. Trying to push liability and responsibility onto engagers will result in behaviours that risk being highly detrimental to the significant numbers of creative, high skilled workers operating their own companies in the UK economy.

    They may choose to withhold from the public sector market as a result of these rules. Because why would someone work for the same effective pay as an employee without benefits like holiday and sick pay?

    As government research has shown (e.g. OTS Small Company Taxation Review and HMRC intermediaries legislation qualitative research), the main reasons for incorporation are not tax minimisation, they are to limit liability, to enhance credibility, and to provide a formalised structure.

    Tightening up IR35 is unlikely to shift a significant number of such workers to PAYE employment, which may be an underlying assumption behind these current proposals.

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