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Government publish IR35 research and unveil plans to modernise tax system

Eagerly-anticipated research into public sector changes unveiled as Treasury sets out new agenda on ‘Tax Day’

As part of the raft of consultations and documents released on what has been dubbed ‘Tax Day’ by the media, the Government published the long-awaited research into the impact of IR35 reform in the public sector.  

This is despite a separate paper, which detailed a 10 year strategy to “underpin a trusted and modern tax system”, stating that this research would not be made available until a later date due to the pressures of COVID-19.

Regardless, the insight - which the Government committed to releasing prior to the introduction of IR35 reform in the private sector on 6th April - examines the effect public sector changes in 2017 have had on employment agencies and also looks ahead to next month’s reform. 

34 agencies were interviewed by HMRC in an attempt to understand how IR35 changes in the public sector have impacted these businesses and contractors. The study also explored the type of support agencies may need ahead of private sector reform. 

In this article we’ll round up the key findings. 


Research exposes forced PAYE working

Agencies interviewed - of which only 12 worked with public sector organisations - reported a mixed experience of IR35 reform in the public sector. Some said the number of contractors engaged remained stable after the 2017 roll-out, some reported a rise, others saw a decrease.

However, with regards to the agencies that noticed a drop in contractors engaged, the research claims this was not as a result of IR35 reform. In fact, it states: “it was more common for this decrease to be attributed to external factors rather than the 2017 reform, particularly the UK’s exit from the EU and the COVID-19 pandemic.”

Even so, agencies did note that “many” contractors had shifted away from operating via a Personal Service Company (PSC) to alternative methods of engagement, such as umbrella arrangements.

While increased umbrella working is plausible, the report doesn’t explore why this trend occurred. In many cases, this uptake was due to needless contractor bans and PAYE-only ultimatums made by public sector bodies, which left contractors with little choice but to work this way.  

That said, many contractors stopped working with organisations that took this blanket approach, as one respondent explained: “When it was supposed to happen in April 2020, we got ready, we sent a letter to everybody and said they had to go on PAYE and loads of them stopped picking up shifts for us straight away. They didn't want to work for us anymore.”


“Upward pressure” on contractor rates

Several agencies reported a rise in contractor rates that resulted from the introduction of public sector reform. The report describes contractors as having “demanded higher gross pay from clients to cover the reduction in their net pay from the deduction of Income Tax and NICs.”

Explained differently, contractors who had been placed inside IR35 looked to ensure they still took home the same amount after tax. Above all else, this point highlights how important it is that businesses do not needlessly place genuine contractors inside IR35. In addition to paying employers’ NI, organisations may find themselves under pressure to absorb rate rises as contractors look to balance the costs of operating as an employee for tax purposes.


Agencies question HMRC’s IR35 support 

All agencies interviewed said they had taken steps to prepare for IR35 reform in the private sector, with some relying on HMRC for guidance and others receiving the support of IR35 specialists such as Qdos or trade bodies. 

A number of firms that made use of HMRC’s IR35 guidance said it could be improved, with agencies particularly critical of the tax office’s failure to clearly explain what IR35 reform means in practice. 

Some participants were of the opinion HMRC could have been easier to contact, while the reliability and accuracy of the Government’s Check Employment Status for Tax (CEST) tool was questioned too. 


Most agencies report “no impact” 

Surprisingly, the research states that most agencies have experienced “no direct impact” resulting from incoming IR35 reform in the private sector, at the time the interviews took place in November 2020 and January 2021. 

The same could not be said for all participating agencies, though. Some pointed towards a decrease in contractors - a trend experienced by many in the public sector in the months leading up to reform in 2017. 

Others said they had drawn a “line in the sand” and planned to stop engaging contractors due to incoming reform. As a result, the number of contractors working via PSCs had dropped or, in severe cases when contractors had been banned, diminished altogether. 


Research uncovers little, if anything, not already known

To conclude, what does this IR35 research tell us? In all honesty, nothing we didn’t already know. And given how few agencies were interviewed by the government, it’s difficult to take too much from this study, even if it does bring to light a number of key issues - whether that’s blanket bans, enforced umbrella working or the lack of faith in HMRC’s IR35 tool, CEST. 

 

What else was announced on ‘Tax Day’?

The IR35 research made up just a small part of what was unveiled on ‘Tax Day’, which brought with it the following developments for freelancers, contractors and the self-employed:

  • The Government have promised to tackle the rise of tax avoidance schemes and disguised remuneration schemes once and for all.

  • A review of the tax system will take place, with the Government to explore ‘pay as you go’ tax for the self-employed which would apparently help people pay the right amount of tax with ease. 

  • An analysis of the performance of the Office of Tax Simplification, whose remit it is to put forward recommendations for a simple and effective tax system. 

 

Qdos are leading specialists on the IR35 legislation, having carried out over 150,000 status assessments and successfully handling over 1,600 status enquiries on behalf of contractors. For more information on how to best prepare for IR35 reform and protect yourself, please contact us.

By:Benedict Smith

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