Businesses at risk from IR35 off-payroll tax reforms (Financial Times)
More than 600 freelance workers protested in the shivering cold outside Parliament last week. They are backed by an intensive business lobby, representing hundreds of thousands of businesses that share the disquiet on show in Westminster over reform of a complicated tax law on off-payroll working, known as IR35.
From April 6, responsibility for assessing the employment status of off-payroll workers will shift from individuals to their hirers. The rule change affects about 230,000 contractors in the UK. All companies — apart from those with fewer than 50 employees or less than £10.2m annual turnover — will need to comply. Firms and recruitment agencies will become liable for unpaid tax if HM Revenue & Customs finds a worker has been wrongly classified.
Companies including Deutsche Bank, Lloyds and Reuters have suffered a backlash from contractors after facing demands that they take pay cuts. Critics are concerned the new rules could have a wider impact on the economy. A monthly jobs report produced by the Recruitment and Employment Confederation, a trade body, found that billings by agencies for temporary staff fell in January, for the first time since April 2013. Many respondents blamed IR35.
The government has estimated that the reforms will cost businesses £14.4m annually. However, tax experts told peers last week that this estimate was far too low. But working out a contractor’s employment status is complicated as illustrated by the string of IR35 cases that HMRC has lost at the tax tribunal. Relevant factors include the autonomy a contractor has over their work, if they can send a substitute in their place and how much “mutual obligation” exists in their relationship with their hiring company.
HMRC has developed an online tool to help companies but many tax experts and businesses have warned it is flawed. HMRC, which has recently made some changes to the tool, said it stood by it and was accurate if used in line with its guidance. However, it acknowledged the tool only works in 85 percent of cases. While some firms are diligently carrying out individual assessments, others have decided to stop using contractors through limited companies from April.
Other companies are choosing to absorb the extra cost of taking on existing contractors as employees. Or they are asking their recruitment agencies to add contractors to their payrolls. Many recruiters are in turn outsourcing this task to payroll agencies, known as umbrella companies. Nevertheless, all these strategies are rife with risks. Chief among these is a backlash from contractors if they believe they are genuinely self-employed.
Self-employed pension engagement ‘tough nut to crack’ (Money Marketing)
More work needs to be done to encourage self-employed workers into pensions, according to a report from the Department for Work and Pensions on auto-enrolment. The annual report provides an update on how the DWP’s trials to encourage long-term saving among the self-employed have progressed.
The trials are put in the context of the gap between those who save through their company pension and the self-employed who have to make their own arrangements. The report points out in 2019 organisations who have some form of workplace pension provision employed 94 percent of all private-sector employees.
By contrast, the proportion of self-employed people actively contributing to a pension has decreased steadily since the late 2000s, from 27 percent in 2008-09 to 15 percent in 2017-18.
Self-employed men more likely to save but gender gap narrowing (Pension Age)
Self-employed men are more likely to be saving than self-employed women, with an approximate seven percentage point difference in their propensity to save.
The research from the Department for Work and Pensions (DWP) also revealed that active pension participation rates amongst self-employed women have been consistently lower than men since 2006. However, the gap has narrowed since 2010, with the study noting that if the definition of participation was extended to include retained pensions, the gap would be narrower still, bringing women’s participation rates in 2014-16 in line with that of men.
Furthermore, whilst the participation of self-employed workers has fallen to 15 per cent in 2017/18, men’s participation rates have decreased more than women’s since 2006, on both definitions. Included within the final automatic enrolment review, the DWP has also published findings from its econometric analysis, estimating the probability of a self-employed individual saving into a pension scheme dependent on ‘micro’ factors, such as age and gender.
The analysis stipulated that whilst income was significant, it was “less significant than might be expected”, with a £10,000 increase in net financial wealth lading to an average increase in the probability of pension saving of just 0.11 percentage points. However, self-employed men, and those on a higher income, were found to be the most likely self-employed workers to save into a pension nonetheless.
While there was a positive relationship between age and the probability of saving into a pension, the analysis also suggested that this could fall with age.
Rishi Sunak blinks in face of industry pressure, says HMRC will ‘go soft’ on IR35 changes in year one (Smallbusiness.co.uk)
Chancellor Rishi Sunak says the taxman will not be “heavy-handed” when IR35 changes come into effect on 6 April, potentially bringing 230,000 sole traders within PAYE.
Answering questions in Birmingham on Saturday night, the new chancellor sought to reassure both companies and freelance contractors, saying the controversial policy will have a soft landing – at least in year one. Sunak said: “I’ve spent time with HMRC to ensure they are not going to be at all heavy-handed for the first year to give people time to adjust as well, which I think is an appropriate and fair thing to do.”
Rishi Sunak is expected to publish the results of his review into the implementation of IR35 ahead of the Budget on 11 March, which is likely to include an information drive for smaller businesses affected by the changes.
IR35 concerns for businesses, contractors and the economy (Consultancy UK)
The problem with IR35 isn’t so much that it’s a bad idea, but more that people simply don’t understand what it means or what they need to do. Forty-nine percent of business owners and 65% of freelancers admit to being uncertain about the full scope of IR35. There are still some grey areas which leave a lot of room for confusion and even with The Check Employment Status Tool (CEST) by HMRC there is still room for misinterpretation as it’s only correct 85% of the time, thereby wrongly placing a significant number of people within the scope of IR35.
It’s estimated that freelancers contribute around £109 billion to the UK economy, which generates an estimated £30 billion a year in “added value” to UK gross domestic product. At a time when the UK is already struggling to come to grips with the financial implications of ‘Brexit’ – and the postulated £1 trillion loss to the UK economy that it will bring as banks and financial institutes look to move their workforce to EU bases – that’s a figure that we can ill-afford to lose.
If IR35 leads to the loss of a buoyant freelance and contract marketplace, it will certainly also lead to a loss of talent and a loss of revenue. In that instance, a loss of growth and innovation will no doubt follow, weakening both the UK’s economy and its place in the global business hierarchy.
IR35 could cause minimal disruption if well-implemented. The fear at this stage is that lack of understanding could mean that that is not the case. And with HMRC only winning 50% of its cases against public sector contractors failing to comply with IR35 to date, it’s easy to see why confidence in the legislation is so low – and why IR35 could well end up being yet another well-meant but ill-conceived political pratfall.
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