What's your view of the impact of the new IR35 guidelines?

(Jon) #1

(Backgrounder useful to this discussion, perhaps for folks who have not been contractors. In this post I discuss IR35, which is a piece of UK tax law that attempts to determine if a contractor really is running his or her own separate business, or if they are effectively undertaking “disguised employment” with a single employer in order to obtain unfair tax advantages. In the UK, if the Inland Revenue decides that a period of contracting was really a period of traditional employment, they can demand tax is paid back as if the contractor had been paid entirely under PAYE. This can be extremely expensive).

I’ve been out of contracting for a while, and while I was gone, the Chancellor moved my cheese. Specifically, the determination of whether a contract is inside or outside the IR35 rules is now up to the client, and not the contractor. The “client” could mean either the recruiter or the end client. This article, while a bit out of date, seems to be a good introduction (in particular the software tool to determine if a contractor is inside/outside is now in use, which hopefully removes the liability from the contractor).

The rule changes have been rolled out to public sector clients already, and then presumably the private sector would follow, if the first tranche is successful. Presumably the intended impact of this is that more contracts will be determined to be “inside” IR35, which will effectively mean more contractors paying more tax.

So, what is the real-world impact? Well, one recruiter told me that public sector clients are effectively forced to agree to a dual day-rate system. For example, let’s say that a contractor under a traditional contracting relationship would charge £350 per day. Under PAYE, the contractor/employee would have to charge £500 per day to offset the increase in tax. And this is happening in practice: public sector clients are agreeing to pay one rate for outside, and another rate for inside, which will hit their already stretched budgets.

This is a double-whammy for public sector clients using percentage-based recruiters. If they have to stump up extra cash because the contractor has become more expensive, then the recruiter (who adds a proportional sum) just got more expensive too. I wonder if the government has made the judgement that increased spent in the public sector will be more than offset by extra taxes to the Exchequer, though we’ll have to see if it works out like that in practice (this article suggests the government believes the change has been a success so far).

Also, I understand that recruiters are being encouraged to treat contractors as “suppliers”, and thus 28-days payment terms apply (or whatever supplier invoicing arrangements are in force at that recruiter). This will have a cashflow impact for some contractors, and will expose them to greater risk in the event of a payment default.

For recruiters and contractors, what has been your experience? Have you seen folks avoid the public sector as a result of these changes? Have you considered going back into traditional employment, based on the perception that the relative advantages of contracting have reduced?

As an interesting aside, I have often voiced the unfashionable opinion that contractors are taxed too leniently, and that on the basis that tax is a subscription to society, we ought to pay a bit more. However, the changes here are not “a bit more” - they are quite a hike. My philosophical bind therefore is that if my wish were to come true - and perhaps more so than I would like - then it may have unforeseen impacts upon the recruitment of contingency skills.