train station netherlands platform 722707

For some, the recent change to IR35disrupted the public-sector and could be seen as an unfair move. The measure came into effect on April 6, 2017, changing the way the IR35 status of public-sector contractors was determined.

What is IR35?

IR35 legislation was established to prevent abuse of the tax benefits deriving from the disguised employment status. This is where individuals work on a self-employed basis, or through a business or umbrella company, despite carrying out the role of a permanent employee in terms of long-term employment with one single employer.

However, the general consensus about this legislation left many contractors and professionals confused about its interpretive rules.

IR35 reforms

In April 2017, there were changes made to IR35 rules in relation to the public sector, which changed the way IR35 status was assessed. These changes now mean that the responsibility for determining if a contractor falls into IR35 rests with the public-sector entity, not with the contractors themselves.

The Domino Effect

This increased liability for the public-sector bodies hiring contractors as incorrect identification could result in legal ramifications. Undoubtedly, this created fear for businesses hiring contractors, leading some to speculate that many contractors have been unfairly categorised as being inside IR35 in an effort for the hiring firms to cover themselves legally.

The still confusing legislation means that public-sector organisations are required to carry out detailed assessments as to a contractor’s IR35 status, which can be a complex and costly exercise.

This has manifested itself into delayed and cancelled projects due to a loss of contractors. This has inevitably had a huge impact on public-sector contractors and their work, which highlights the important role contractors have within the UK.

The IR35 reform was implemented as the government estimated that the use of contracts to avoid tax costs the Treasury around £400 million every year (HRMC, 2014).

The End Result

As this change has negatively affected the working life of a number of public-sector contractors, many have subsequently withdrawn from public-sector contracts. This lead to a loss of many highly skilled individuals working in the public sector, causing a delay to many existing and future public-sector projects.

On a positive note, with every major change, industries have to adapt and this sometimes creates unique opportunities that never previously existed. The effects observed in public-sector projects may also prove insightful for the things to come in the private sector, which may see itself targeted in the future. This gives proactive contractors time to assess how they might be affected and to put any measures in place to resist the negative effects associated with IR35 legislation changes.

We shall have to see if the Government accepts this as a failed experiment or whether cost increases will simply equilibrate to cover any additional tax burdens.

Gorilla Accounting is a specialist accountancy firm for Contractors and Freelancers operating through a Limited or Umbrella Company. For more information on IR35, read our ‘What is IR35?‘ guide.