Irrespective of the significant changes the Government has been through so far in 2016, it is clear that the political desire to target tax avoidance and off-payroll working remains.
After a number of high profile headlines calling out public sector contractors (such as BBC presenters) for paying the incorrect amount of tax, HM Revenue & Customs have been working to amend the existing IR35 legislation. The objective is to make it harder for individuals to falsely operate as a personal service company (PSC) in order to reduce their tax liabilities.
What changes are being proposed?
The main change to IR35 proposed by the government is to shift the responsibility of ensuring individuals are paying the right tax to the ‘engager’, where the end client is a public sector organisation. And with the Government estimating that only 10% of PSCs are currently complying with the legislation, there’s a significant risk of upheaval waiting just around the corner.
When will it come into effect?
At the time of publishing this post, the proposed changes are planned to come into effect in April 2017.
However, the Government has not yet provided feedback on the responses received to the consultation that closed on 18th August 2016, so implementation is still subject to change and delays. Additional clarification is also required from the HMRC on the time frame in which recruitment firms would be expected to implement changes.
Who will it affect?
For this round of changes, the legislation will apply in any instance where the end client is a public sector body. So, whether you’re a public sector body who works with contractors or a third party organisation that provides contractor support to the public sector, you need to pay close attention to the changes and how they might impact your organisation. Alternatively, consider partnering with a company like Experis that can put a plan together for you.
The changes will not impact private sector ‘engagers’ at this point, providing that they are not supplying contractors to the public sector.
What are the risks?
The Association of Independent Professionals and the Self Employed (IPSE) predicts that 54% of the 26,000 PSCs currently working with the public sector will stop, if the engager is permitted to deduct tax and NICs on their behalf. Therefore the risk of ‘brain drain’ in the public sector and organisations that primarily work with the public sector is significant. This may cause a number of projects to grind to a halt until they can find talent willing and able to work in this capacity.
The potential impact has already been demonstrated within the Government, with 30 out of a possible 32 IT contractors leaving the UK Hydrographic Office (UKHO) since August 2016, due to strict implementation of the new regulations.
At Experis, we are concerned about the impact of the change in regulation to the IT sector. In a sector where organisations are already struggling to find the right talent, it wouldn’t be a great leap to see how such a change would further encourage IT workers to set their sights abroad to countries courting their talent post-Brexit.
How to prepare for it?
Whilst this will represent a significant change for organisations and contractors alike, we are still awaiting clarification from the government as to the exact nature and scope of the final regulations. However, there are already a number of options that your organisation should consider deploying now that will not only mitigate any likely risk from the eventual new IR35 regulations, but also optimise your use of talent for the long term:
- Employed Consultants – As payrolled employees, Employed Consultants (ECs) are already outside of the scope of the new legislation and therefore would represent a steady investment for any project – as well as the cost savings and flexibility ECs can already offer to organisations. ECs could either replace your existing contingent workforce, or your existing contractors may consider becoming ECs.
- Statement of Work projects – If developed correctly, deliverable or outcome-based solutions will ensure that all PSC work can meet IR35 compliant requirements.
- Managed Service – If you have a significant number of contractors, the likelihood is that the new regulations will significantly increase the time required to process these individuals, as well as increasing financial risk for your organisation. By implementing a Managed Service, you can avoid this, transferring all of the admin and risk to the master vendor.
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