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No ‘IR35′ in Spring Statement splits contractors’ advisers
Nearly 12 months on from the IR35 reforms introduced into the public sector, we can now assess much more clearly the impact of the changes on the thousands of contractors affected.
That’s vital if we’re to get a good handle on what could be around the corner for the private sector tomorrow.
Feelings were running understandably high in the first quarter of 2017, with much uncertainty and fear. Commentators calculated that public sector workers could be anything between 13% and 30% worse-off, if their contracts were deemed to be inside IR35 following the changes. We were among those who highlighted that the new legislation would, in effect, move the perceived problem from one of ‘false self-employment,’ to ‘false employment’ for contractors genuinely outside IR35, but deemed otherwise by ill-informed or risk-adverse end clients.
Adding to the rancour and confusion, HMRC’s online status tool (CEST) was continually criticised by many as unfit for purpose as it ignored some case law in favour of HMRC’s interpretation. HMRC has finally admitted that the tool ignores Mutuality of Obligation — one of the essential tests used to establish if an employment relationship exists.
Over the last 12 months, we have witnessed the following impacts:
An explosion of tax avoidance and tax evasion schemes using offshore companies, loans, and fake intermediaries. Despite HMRC publicising the illegality of these schemes, they continue to proliferate and will do so as long as HMRC fails to enforce legislation.
Large numbers of public sector contractors deemed to be inside IR35 under so-called ‘blanket’ decisions made by their end clients, with very few able (or willing) to listen to reason and change their opinions.
Contractors leaving the public sector both at the end of contracts and mid-term to seek alternative arrangements — often in the private sector, in an attempt to protect income levels.
A move by many public sector contractors to join PAYE umbrella companies. With the loss of the 5% allowance under IR35 (for administration fees) to run a PSC, combined with the changes to the Flat Rate VAT scheme since April 1st 2017, many saw fewer advantages to running a PSC
Some success in contractors re-negotiating day rates, where they have taken up PAYE/umbrella employment, in order to compensate for their loss of earnings. Typically, we have found contractors were — despite the 13%-30% projection cited earlier, between 14% and 18% worse off when deemed to be inside IR35. In a small number of cases though, day rate increases of these percentages have been secured.
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