Contractors welcome Lords inquiry into IR35 before tax reforms hit private sector but fear it's 'too little, too late'

Seeing as rules roll out in April and freelancer confidence is at a 6-year low

The House of Lords has opened an inquiry into the UK.gov's controversial off-payroll working rules set to come into effect later this year, as confidence in freelance business drops to its lowest recorded levels.

The Finance Bill Sub-Committee will probe the government's proposal to extend IR35 into the private sector on 6 April 2020. IR35 is a so-called tax-avoidance rule that applies to all contractors and freelancers who do not fall under HMRC's definition of being self-employed.

From April, all medium and large businesses in the UK will be financially liable for determining whether contractors they hire fall within the scope of IR35 legislation.

Contractors within scope must pay similar tax to full-time employees, despite not receiving holiday or sick pay, or any other benefits.

The measure is expected to affect 170,000 people who work through their own personal service companies. The change is likely to hit a large number of IT contractors, particularly those who left the public sector in 2017, when the reforms were first introduced there.

The Lords inquiry, which follows a wider government review that kicked off in January, will consider how the new rules will impact private-sector businesses and contractors, and whether the new tests to determine workers' tax status is clear. It will also review feedback from the public sector, which has been tussling with the reforms for a few years.

Lord Forsyth of Drumlean, Chair of the Finance Bill Sub-Committee, said:

"The Government is proposing to extend the off-payroll working rules to large and medium-sized organisations in the private sector. We are interested in how this change will work in practice, and how it relates to wider changes in working arrangements.

"To inform our work we want to hear from as broad a range of people and organisations as possible. If you have a view on off-payroll working rules, please let us know what you think."

Contractors haven't been backwards in coming forwards, as previous Reg satories have established

The public-sector reforms, which the the government hoped would recoup £440m by bringing 20,000 contractors in line, were previously described as an "utter shambles". The change triggered a mass exodus of government contractors, many of whom decided to jump ship to the private sector rather than face IR35.

The Ministry of Defence lost 30 of its 32 contractors, who balked at the department's allegedly blanket approach to enforcing the guidelines. A survey by ContractorCalculator stated that 80 per cent of public-sector IT projects were at points in time delayed as a result of contractors leaving.

In a ham-fisted way, government departments advised IT contractors to hike up their fees by 20 per cent to staunch the flow of departing techies. The National Audit Office said that Whitehall needed to splash £245m on contracts if it was to meet the shortfall in skills. So the introduction of IR35 in the public sector wasn't exactly smooth.

In response to the upcoming changes within the private sector, a raft of companies – including Barclays, Royal Bank of Scotland and GlaxoSmithKline – have said they will no longer employ off-payroll workers. According to recruiter Harvey Nash, 20 per cent of businesses are considering similar action.

Tax experts reckon that IR35 could reduce workers' income by 25 per cent, costing contractors thousands of pounds in additional income tax and National Insurance contributions. The Association of Independent Professionals and the Self-Employed (IPSE) recently called on politicians to scrap the new rules.

In response to the Lords inquiry, ContractorCaculator chief exec and longtime IR35 critic Dave Chaplin said: "We are delighted that the Lords are paying attention to the problems that are being caused by this ill-thought out legislation. The proposals have opened the door for a new status of 'no-rights employment' which must be urgently addressed.

"The Treasury and HMRC have consistently claimed that the so-called reforms will not affect the genuinely self-employed. The evidence is now clearly to the contrary, and government must act now by ensuring firms can continue to hire contractors without undue risk."

Others said that the inquiry, which is accepting submissions until 25 February, is overdue. "With 6 April closing in, too little, too late springs to mind, but nonetheless we welcome any serious examination of the incoming reform," said Qdos Contractor chief Seb Maley.

"Even though a U-turn seems very unlikely at this stage, it's vital that all parties impacted by the changes put forward their views, which could be crucial in waking the government up to its failures regarding IR35."

Andy Vessey, Larsen Howie's head of tax, said: "This invitation to provide written evidence is, while welcome, very hurried; with the closing date being 25th February and the Spring Budget, where it’s expected the intentions for IR35 to be announced, scheduled for 11th March, it’ll have to be a considerably rapid turnaround to make any major decisions other than postponement."

"Medium and large-sized businesses shouldn’t be count on a delay and would be wise to continue with their preparations for 6th April."

The inquiry comes as freelancers' business confidence slumps to a six-year low driven by anxiety over the looming IR35 deadline. A new report [PDF] by The Association of Independent Professionals and the Self-Employed found that contractors' confidence about the next three months has dropped 14.7 per cent, the biggest fall since records began. For the year, confidence has fallen 23 per cent to its the third-lowest level, despite a perception that the wider economy is recovering.

The report noted that freelancers' earnings have already dropped 6 per cent this quarter due to cuts in the average day rate and increased time spent not working.

Inna Yordanova, a senior researcher at IPSE, said: "This alarming slump in freelancer confidence should be a wake-up call to government. The changes to IR35 are causing alarm right across the freelance sector and they should be halted before they do serious damage to this vital part of the workforce." ®