The introduction of IR35 reform in the private sector has brought a number of issues into sharp focus for contractors – none more so than the problem of ‘zero rights employment’, which the government have now been urged to abolish by the vast majority of contractors.
A telling 82% of contractors surveyed by Qdos in one of the first studies exploring the impact of recently enforced IR35 changes have called for employment rights when operating inside IR35, where they are subject to employment taxes.
Zero rights employment occurs when a contractor is deemed inside IR35. Working under the IR35 rules means a contractor must pay Income Tax and National Insurance Contributions (NIC) on that assignment.
However, the sticking point is that despite paying PAYE tax – just like an employee does – the contractor isn’t granted any employment rights, such as holiday, sick, maternity or paternity pay, in exchange.
What’s more, working inside IR35 can result in a contractor taking home anything up to 30% less after tax, which is why the government has been encouraged to resolve the situation.
The problem has become even more prevalent following the arrival of IR35 reform in both the public and private sectors. While over a third (35%) of contractors have been assessed as outside IR35 by their client, as many as two in three (65%) explained to Qdos their contract was classed inside IR35. This suggests potentially tens of thousands of contractors are facing up to the prospect of zero rights employment.
Given that abolishing the IR35 legislation seems out of the question right now, a possible solution is for the government to align tax status with employment rights. It would mean contractors classed as employees for tax purposes (inside IR35) receive employment rights.
But how likely is this to happen? Well, Westminster looked into the situation, in the Employment Status Consultation in February 2018. As the document states: “Some commentators have questioned why individuals can be deemed employees for tax purposes but not be granted any employment rights.”
“Given the views raised by stakeholders, while we are considering whether employment status definitions for employment rights and tax should be aligned, we want to use this opportunity to address the views raised by stakeholders to also consider whether these deeming provisions for tax should be reflected in employment rights legislation.”
But the fact of the matter is that little progress has been made in over three years. And you could argue that a decision should have been made before the introduction of IR35 reform in at least the private sector, given the changes have led to a significant rise in the number of contractors operating under IR35.
Having carried out over 150,000 IR35 status reviews since the legislation was introduced and saved contractors over £35m in potential tax liabilities, Qdos are a leading provider of award-winning IR35 services, including IR35 insurance. For more information, please call 0116 262 0999 or email [email protected].
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