Off-payroll is currently in full-effect in the Public sector. However, following consultation, the government has delayed implementation of the Off-payroll rules until April 2020. It has also limited the new rules to medium and large-sized end-user businesses. Small businesses will not be required to apply the new rules.
The Off-payroll amendments were introduced by the HRMC to increase IR35’s tax yield, however, this increase could have a toxic impact on the previously amicable relationship between businesses, agencies and the self-employed, by destroying the supply chain dynamic and therefore considerably damaging flexible working in the UK. By giving clients and agencies compliance obligations, and a significant degree of risk, this amendment could lead parties to act in their own best interests by breaking the law.
How could the Off-payroll rules encourage exploitation of contractors?
The Off-payroll rules make clients responsible for assessing the IR35 status of their contractors, and face the looming threat of substantial tax and penalties if HMRC challenges an ‘outside IR35’ assessment. Deeming the tax risk as outweighing the reward of continued flexible access to key skills, clients could refuse to engage contractors outside of IR35, even where there is a clear contract for services. Within the confines of an engagement compliant with Off-Payroll, a client can’t attract the best contractors without either leaving themselves open to tax risk or incurring greater costs. The majority of contractors won’t blindly accept contracts advertised as ‘inside IR35’ without at least increasing their rate by a proportionate amount.
In the public sector, the imposition of blanket bans on limited company contracting in response to Off-Payroll has resulted in mass contractor walkouts. This move caused heightened skills shortages and project delays, offering a glimpse into what the future potentially holds for the private sector. In an effort to cut down costs, some public sector clients have persecuted contractors by deducting their own employer’s National Insurance liability from the contract fee and using similar underhanded tactics to reduce the amounts paid out. Exploiting contractors by compounding tax hikes with unlawful reductions in pay has proven commonplace among public sector clients, most notably within the NHS. Far from being the high earning, tax-savvy individuals that HMRC perceives, many contingent workers who remain in these exploitative arrangements are paid relatively low and do not have alternate employment options.
How to rescue these relationships
The public sector has shown many contractors are willing to leave if they feel they are being taken advantage of. Transparency and honesty is of utmost importance for agencies to attract talent and maintain a healthy supply chain. The message from agencies should be the same as from contractors: if clients want access to talent, they will either have to accept the accompanying tax risk or extra cost. For more information on IR35 and how it will affect your business, contact Aston Black Accountants today.