The main change is likely to be that employers will be made responsible for determining whether IR35 applies, rather than the individual and their personal service company (PSC). Where IR35 applies, PAYE will be applied on payments to the PSC, as if the payment were made to the individual.
If announced, this change will be particularly significant for the recruitment industry due to the high number of contractors operating within the temporary labour market. The effect would be that firms would become more cautious about using such staff, in the knowledge that they will be responsible for tax underpayments if they get things wrong and the cost of contract labour will rise. Due to the extra tax burden on contractors, some could choose to withdraw from the temporary employment market altogether as the balance of the risk/reward shifts against them.
The public sector has seen a significant drop in the number of contractors since the rules were introduced in April 2017. Many former public sector contractors are now working within the private sector. If the expansion of the IR35 changes takes place, it will change the employment dynamic in many industry sectors where temporary or contract workers are commonly used by employers to provide specialist skills or fill employment gaps.
Tim Dunn, partner and recruitment sector specialist at accountancy firm, Menzies LLP, said:
“Whilst I recognise the need to level the playing field between the public and private sectors, the Government must consider the impact that the proposed changes could have on recruiters and the many sectors that use contractor labour.
“If businesses start to view self-employed workers differently just because of their altered tax status, this could have a negative effect on expansion opportunities. In addition, if the tax breaks associated with self-employment are reduced or removed, temporary or contract workers are more likely to take up longer-term, in-house positions instead. The skills shortage in the UK labour market is well publicised, with fewer contractors operating in the market this will only get worse. Contractors provide flexibility, and this can be an important stimulus for growth.
“Access to flexible, skilled, self-employed workers could effectively dry up overnight unless the Chancellor finds a way to soften the blow of the new IR35 rules on the UK labour market.”