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Will IR35 reforms be extended to the private sector?

IR35 Reforms

In the weeks running up to the Autumn Budget back in November, the industry was abuzz with “will they, won’t they” speculation with regards to whether the government would take the plunge and extend April 2017’s public sector IR35 changes to the private sector.

In the event, it was something of a damp squib, (or perhaps just the government’s way of sneaking it in through the back door, depending on who you talk to.)

No mention of a rollout to the private sector was made in Chancellor Philip Hammond’s Budget speech, leaving us to consult the small print for answers. This is the wording of the Budget document:

"3.7 Off-payroll working in the private sector – The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. It is right that the government take account of the needs of businesses and individuals who would implement any change. Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018."

What changed in April 2017?

Before we go on, here’s a quick recap of the reforms to IR35 which were introduced in the public sector last year:

From April 2017, responsibility for determining IR35 in the public sector shifted from the individual personal service company (PSC) director to the end client.

If the client decides a contract is caught by IR35, it now falls to the “fee-payer” - the party paying the PSC - to deduct the appropriate PAYE tax and NI at the source, exactly as they would for an employee on their payroll. To reiterate, this change only applies to public sector contracts - at least for the time being.

The consultation process

According to the Budget detail, it is HMRC’s opinion that reforms to “off payroll working” in the public sector have been a roaring success, with IR35 compliance on the rise and the treasury coining it in. So, when it comes to extending these rules to the private sector, the government’s endgame seems clear, they will consult on extending the rules to the private sector, with the findings of the consultation expected sometime in 2018.

The March 2011 HMRC / Treasury Tax Consultation Framework sets out the process for how consultation should be carried out.

So what does this mean for a possible rollout to the private sector? The clue is at Step 6 of the consultation process:

“Draft clauses for the Finance Bill will be published for scrutiny at least three months before the Bill is introduced to Parliament. The period for comments to be made will be at least eight weeks”.

With this in mind, unless a consultation comes out imminently, they are unlikely to steamroller this across the private sector in April 2018; with April 2019 looking more probable.

What the experts think

We asked some industry experts for their opinion on when, or indeed if, the reforms to IR35 will be extended to the private sector.

Dave Chaplin, CEO of leading contractor website ContractorCalculator believes the government had their reasons for keeping the timescale vague. He said:

“It was purposely vague in the Budget to keep their options open. They would be brave, and in my opinion, unsuccessful, if they pushed for April 2018. So the likelihood is April 2019. However, by then the economic landscape may have changed considerably and there may not be enough political will to push it through. It could get kicked into the long grass for many years. But then it would leave the public sector in a heavily disadvantaged situation when it comes to hiring contractors for Brexit needs. Damned either way really.”

John Chaplin, Executive Director of business advisors EY, fears that a rollout to the private sector is looking like a done deal. He said:

“Some observers seem to think that the Consultation in the Spring will provide the opportunity for them to explain just why it won’t work for the private sector and that there is a chance that HMRC will listen, but I think it’s already too late for that. HMRC believe that they already have proof of concept from the public sector, so the Condoc (consultation document) could be as short as “We are going to roll it out to the private sector, discuss!”

In my view, responses to the Condoc will need to focus on how to ensure that any roll out to the private sector is fair and straightforward and not the mess we saw in the public sector”.

Getting to grips with IR35

If and when these rules come into the private sector, it is anticipated that they will have a less disruptive impact than they had in the public sector earlier this year.

However, it is important for recruitment business owners to fully grasp the IR35 rules and the potential impact an extension to the private sector will have on their operations.

Liquid Friday has launched an IR35 Hub to help recruiters, contractors and end clients get the essential knowledge they need, through a series of short videos, articles and guides.

For further information on this subject please visit: https://www.boox.co.uk/boox-blog/

Tagged With: Blog, Tax, IR35, Budget, Private Sector, Treasury Tax Consultation Framework, Autumn Budget

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