The policy paper issued in Budget 2020 had words most contractors were dreading.
The government has recently concluded a review of the reform, and is making a number of changes to support its smooth and successful implementation. The government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 and implemented on 6 April 2020, as previously announced.
At Mindful we have believed for a while this would be the outcome of the process. We predicted this result in January when speaking to AccountancyAge.
Despite the CEST updates and the ongoing IR35 review, Kapoor said he has not seen any indication that HMRC will pull back on IR35. “In our view, the government tends to follow a demonise-legislate-tax approach for segments of society it wants to target,” he said. “The sound-bytes from the government suggest that contractor tax avoidance is seen as a societal imbalance that needs to be corrected.”
We hate to have been proven right, but we were only following the cues this Government has been leaving with many decisions it has recently made. There appears to be a bit of “end justifies the means” at play.
The Value of a Contractor
Contractors are undoubtedly not happy with how its’ all unfolded. With some businesses making blanket decisions, and others discarding contractors altogether, it is no wonder that contractors feel that they are being cornered and unfairly treated. However, no one wants to be treated like this. Times can change and the balance of power can shift. In the long term, what will emerge is this:
Contractors provide undisputable value for money to the clients they serve. The comparator for a contractor is not so much an employee, but instead a consultant sold by big outsourcing giants at heavily inflated day rates.
Whilst the merit of a contractor may never really be publicly acknowledged (especially after, all the demonisation), we believe the below are some of the possible side-effects of the current policy that can cause the tables to turn in due course.
Contractors Go Abroad
It’s quite simple. No one wants to be in a hostile environment, and other countries may benefit hugely from the IR35 changes. Contractors can work flexibly, and in many cases, working abroad is quite easy to do – and often, comes with higher day rates. Why would contractors stay where they are not welcome, when they can go elsewhere to a welcoming environment? The government may think that these changes will benefit them from a tax perspective, but they may find the opposite is true. Businesses are also highly likely to lose out on talented staff.
It is likely that contractors will still apply to less enticing “inside IR35” jobs, more to hedge their bets than really do the job. A hirer with an inside IR35 job is vulnerable from not having who they like until that contractor actually starts. Probably even after. This is a waste of valuable time for businesses.
Once a candidate joins a hirer inside IR35, there is virtually no chance that the contractor would risk taking an outside IR35 job with the same client later – even if the hirer had a change of heart when the contractor wishes to desert the contract. Most accounting and tax advice is clear that converting from an employee-like role to a contractor is most likely a contrived arrangement from the taxman’s point of view. For hirers, this means you only really have one shot at getting an individual you like if hiring on an inside IR35 basis.
The government may not have considered that contractors who can’t find outside IR35 opportunities may apply for Universal Credits instead. There are many contractors who don’t want to work on a permanent basis for employers, and after putting so much into the system, they may be more than willing to take it back out. Not all forms of Universal Credits are means tested, so a high balance in Company Bank Accounts isnt a deterrent to apply for UC.
Businesses are likely to face a high turnover of staff after the IR35 reform. Contractors will accept unattractive inside IR35 packages, due to desperation and fear, but may leave without any remorse or consideration when outside IR35 jobs emerge. This could leave businesses with projects unfinished at critical stages.
Employment Law Violations
Some organisations will use the reform to make lay-offs, and therefore, they will violate the employment law. The two-year employment limitation period gives employers enough free hand to use such tactics. The strategy being as follows: Convert a large pool of contractors to employees or pseudo-employees; Make a case for redundancy when the need for the number of resources reduces; Presuming ex-contractors are more skilled and experienced, the redundancies affect the always permanent pool of staff.
Too difficult to say yet, what could tip over the policy change.. We will continue to keep tabs and let you know when we pick up any cues.