Executive Grapevine | Executive Grapevine International Ltd

Mapping it out from here

After the most recent consultation, where does IR35 go next?
Mapping it out from here


Last year, Recruitment Grapevine spoke to Adrian Marlowe, Chairman of The Association of Recruitment Consultancies (ARC) about the beginnings of IR35. We pressed him for his thoughts on whether this vexatious legislative change in the public sector was doing as HMRC intended and it's financial, administrative and political impact. Perhaps predictably, he didn't think much of it: calling the changes "incredibly unfair", particularly on agencies.

The infamous part of Chapter Ten tax law, designed to recoup what HMRC perceive to be tax it is owed from contractors, was changed for the public sector in April 2017. The impact, as well as the manner in which it was introduced, was much to Marlowe’s chagrin – with ire saved for the Government’s consultation process. “You have to ask what’s the point in having a consultation if the Government has made a decision already,” he asked. Marlowe wasn’t alone in thinking that the approach had a hint of fait accompli about it.

A year on from the Government’s consultation on whether IR35 tax procedures should be adjusted in the public sector, and those affected by the legislation - contractors, hiring clients and recruiting firms - find themselves at a similar juncture. However, this time around HMRC are seeking serious opinion on whether changes should be extended to the private sector. In August, a HMRC consultation, which sought to take onboard the opinion of private businesses, including recruitment agencies closed.

Yet, the consultation itself has attracted criticism. Pete Holliday, Managing Director of Sopra Steria Recruitment, believes that the consultation was not as visible as it could have been – potentially cauterising the variety of feedback HMRC received. “The way the Government publishes the document doesn’t necessarily make it visible for businesses [to find and give their feedback],” he said. “When we then wrote to firms asking for their feedback, most weren’t aware a consultation was occurring. My view is that the consultation hasn’t been pushed out to businesses to genuinely capture their response. I’m worried it may not have reached enough clients.” Much like Marlowe’s gripes about the public sector consultation, Holliday’s criticism raises strong questions as to how much feedback HMRC truthfully wanted to collate.

“Neither us or our clients believe that anyone shouldn’t be paying the right amount of tax – we support that. However, the principal of HMRC outsourcing the tax assessment to the client and outsourcing the tax deduction to the recruitment company is flawed.”

Pete Holiday, Managing Director, Sopra Steria Recruitment

 

Despite these concerns, the Sopra Steria MD adds that if the consultation document is taken at face value then the Government appear to be seeking alternate solutions on how this piece of taxation legislation should, and could, work. Under these auspices, Holiday has suggested to the Government that instead of extending IR35 to the private sector, HMRC should utilise information they already have access to ensure private sector contractors are in line with tax responsibilities.

He believes that the requirements already in place under the Intermediaries legislation [IR35] mean the Government already have access to the tools they need to ensure compliance and combat tax avoidance. “The Intermediaries legislation requires every recruitment company who places contractors, regardless of sector, to report to HMRC every quarter, listing all the contractors they’ve placed – along with their Limited Company information and the amount of money that was paid gross to that worker,” he says. “Our proposal is that, whilst we support HMRC’s crackdown on tax avoidance, we believe that they should utilise the information they already have. Furthermore, we don’t agree with passing the tax deduction responsibility to the recruitment company. We challenge their method, not the principle.”

It would be easy to write off Holliday's comment as protectionist, keen to negate any further risk the recruitment industry would have to bare. However, his concerns are shared by those outside the industry too. Mike Smith, Director of Business Expert, who offer advice and funding solutions for small businesses, believes that an extension of off payroll changes to the private sector will place an unfair burden on recruitment firms. “The impact on the recruitment industry will almost certainly be in the administration area, checking potential recruits for IR35 compliance.” He also believes that it will force many private service companies into insolvency, citing the impact this had in the public sector where over 1,000 personal service companies [PSCs] ceased trading around the same time IR35 changes in the public sector were made.

For recruiters, any closure of PSCs will cause a reduced pool of contract candidates. It's not surprising, therefore, that the industry has been vocal on this subject. The changes to contracting law within the context of, Brexit, for example and the long-term supply of talent, and it's easy to see why IR35 is seen as an issue.

 

That said, rumours still abound in the recruitment sector that public sector-style IR35 changes will inevitably be rolled out into the private sector in the same manner - regardless of HMRC seeking external opinion. Holliday says this is causing most of his clients to fret about the impact on their business. He cites the unerring streams of negative feedback on the law that has flowed since well before the public sector changes were implemented. Some of the most damning criticism came after changes last March - with some horrendous PR incidences for HMRC to bear.

Earlier this year, HMRC were forced to admit that there was no evidence on the accuracy of their self-assessment tool (CEST). Additionally, they have lost several cases when taken to court, the result of challenges to their own tax assessments. One particularly bad news day for HMRC came when reports emerged that one BBC contractor attempted suicide after HMRC began its crackdown on the broadcaster's contract practises. Although HMRC believe the changes have resulted in increased tax receipts for the public purse, the ongoing litany of U-turns and legal wrangles will hardly fill recruiters and contractors with hope that private sector changes will be any more straight forward. And, with many organisations relying on contractor hires for their own bottom line, the hit could be huge. “Business could be affected – especially if the continuity of contractors is hit,” Holliday adds.

 

There are also legal implications to consider. Seb Maley, CEO of Qdos Contractor, believes that the hiring industry has borne a significant brunt of the liability since the legislation was introduced in 2000. Although the primary impact has always been on contractors, agencies have always been culpable for the legality of their contractors’ contracts. This puts agencies at risk of loss of business, particularly if they adhere to strict interpretations of the law. Maley is also concerned about where the next round of changes might direct the legislation - particularly if they are rolled out in the Chancellor's next Spring budget. "The future, regards IR35, is uncertain at best," he said. "UK business is waiting to hear the Government’s next move with regards to private sector reform. While nothing has been confirmed [the consultation has only recently closed] further reform is widely expected in due course. That said, and contrary to speculation, changes could be managed – although that isn’t to say it would be a smart move from the Government.”

 

Alex Grant, Managing Director of Quest Pay Solutions, a recruitment payroll firm, and Recruit Ready, a recruitment services firm is another who believes it’s likely that IR35 will be rolled out to the private sector. “If the revenues from IR35 in the public sector are as HMRC are suggesting [£700millon has been cited], it is highly likely that it is only a matter of time until public sectory-style changes, or similar changes, are implemented in the private sector,” he said. However, Grant believes that this could spark an even bigger fallout. “The impact from this could be massive, as there are many different sectors where candidates engage in work through Limited Companies. My hope is for the good of recruitment industry that a sensible approach is taken to minimise the impact. It would be nice to see the Government looking to work alongside the industry to ensure any changes don’t have such a detrimental impact.”

The “detrimental impact” that Grant fears is one largely agreed upon. Maley has previously criticised the Government’s “sledgehammer approach” to the implementation of IR35 changes. Others criticised it for being “tweaked on the fly” - with condemnation aimed at which parties are liable, the assessment itself and the short lead-in time before the changes were implemented. There's also been a financial cost. Recruitment trade body APSCo surveyed its members and found that almost half (45%) found that costs of resourcing contractors had risen. Seven in ten APSCo members also noted contracting numbers in the public sector had dropped. Taking this impact into account, Samantha Hurley, Director of Operations at APSCo believes that if the Government does want to extend the changes, then they should consider delaying the implementation by 12 months and, if changes are made, putting the liability for tax onto the very top of the supply chain. She also believes HMRC should educate and communicate around the changes much better than it has.

Q2 2017 – 1,132 Personal Service Companies [PSC] go into liquidation around the same time that IR35 underwent changes in the public sector. Many contractors operate through PSCs.

Much like Hurley, Sophie Wingfield, Head of Policy at the Recruitment and Employment Confederation, says that “rushing ahead with changes to IR35 in the private sector would repeat the mistakes of the public sector implementation and risk damaging the flexibility of the labour market.” Instead, she says that the consultation feedback must be used to fix problematic areas. “The Government must use the IR35 consultation to fix issues such as the HMRC’s CEST tool before considering an extension to the private sector,” she says. “For a private sector extension, April 2019 would be too soon. Rather than tinkering around the edges, the Government needs to adopt a more holistic approach to tax and employment status as recommended by Matthew Taylor in his review of modern employment practices.” She also believes it’s the history of incessant changes within IR35 laws that signal potential future brouhaha. Agreeing with Holliday's assessment, that it is right that the Government goes after tax avoidance, she adds that “piecemeal changes to IR35 [ as seen in the public sector] legislation aren’t the best way to tackle non-compliance.”

Yet, with the consultation having only just closed, the if, and when, and how HMRC might go through with changes to the way IR35 operates in the private sector are not yet mapped out - at least not publicly. The Government are still in the process of mapping out the route ahead. And, whilst there is overwhelming belief, amongst recruiters and contractors, that the closure of the consultation process is merely one stop on an iterative IR35 journey, there is hope that HMRC would not have sought advice if they did not genuinely want help. But, will it be more like the journey from Chesham to Chalfont & Latimer, the longest length between stops on the tube, or short and sweet, like Leicester Square to Covent Garden? Additionally, will changes be delayed? And, when they are implemented, who will liable and where will the administrative burden lie?

Whilst ARC's Founder might conclude it's all a foregone conclusion anyway, currently there have been no further public pronouncements. "I hope there isn't a difference between what we've proposed and what HMRC are proposing," Holliday concludes, adding, "I hope that HMRC will, this time, consider the views of business." Only time will tell. Tempus narrabo. For many in recruitment, it’s a case of crossing fingers and hoping the right train will come along.