What do the most recent IR35 proposals mean for HR?

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I have previously blogged on the impact that proposed changes to IR35 legislation will have on the HR function, not least the extra burden and risk associated with determining whether contractors work inside or outside of the legislation. In the latest chapter of the ongoing IR35 saga, it has been proposed that from April 2017, recruitment firms will be responsible for determining the status of an assignment to supply services through a Personal Services Company (PSC) to the public sector – but what does this mean for HR?  

HR professionals working with public sector organisations will be all too familiar with the acute talent shortages that are sweeping a number of sectors. Caps on agency pay rates have impacted healthcare, national teacher shortages are widely reported in the press and senior level social workers are increasingly thin on the ground. These changes are likely to exacerbate these challenges.

Under current rules, the liability for determining if an assignment falls within IR35 lies with the individual worker and his or her PSC through which the services are provided. However, the new proposals mean that recruitment firms will be responsible for determining the contractor’s tax status and consequently are liable for coughing up unpaid taxes and National Insurance Contributions should HMRC decide that their decision is incorrect. It’s likely that, under these circumstances, recruiters are more likely to err on the side of caution when determining status, which in turn could have a disastrous effect on the availability and cost of talent within the public sector.

If these reforms go ahead, rather than saving money, it is likely that the budgets of HR departments will be squeezed as the cost of the tax and National Insurance contributions would be passed onto the public sector end-client, along with other statutory costs, such as the apprenticeship levy.

This is not scaremongering, a survey of independent professionals undertaken in July 2016 by IPSE showed that the majority of respondents would terminate public sector contracts if required to pay tax and NICs as an employee – with a further 39 per cent saying that they would work on public sector contracts - but would increase their day rate to compensate for the additional tax liability.

A report by HMRC’s own research team into proposed changes to intermediaries’ legislation found that employers view interims as ‘central to the success of their businesses’. Government cuts to both frontline services and back office functions mean that managing an efficiently flexible workforce is more crucial than ever for many public organisations. These changes have the potential to upset the carefully crafted strategic workforce plans that many HR teams have in place.

A recruitment firm will not be able to recruit for a role if they don’t know how much they can pay the contractor, or what model can be used, so this will need to be determined before recruitment takes place. In reality, the only party in the chain that can take this decision before the role begins is the end client.  If the responsibility sits with the end client then compliance can cascade down through the supply chain through contractual obligations.  That’s not to say I think that’s what they should do, because any change of this nature will cost the Government more money than they will gain in tax revenue.

Several years ago, HM Revenue and Customs (HMRC) was tasked with opening at least 230 tax evasion enquiries per year into freelancers and contractors. It took only two years for HMRC to miss this target and put the future of current employment status tests in doubt. HMRC opened 192 IR35 enquiries into contractors in 2013/14, 25 per cent fewer than in 2012/13 and 81 per cent fewer than in 2003/04, when HMRC opened over 1,000 investigations.

It’s anyone’s best guess how many enquiries have been opened since, as HMRC has refused to disclose the numbers for 2014/15 and 2015/16 saying, “we believe disclosure would be likely to prejudice the assessment or collection of tax”.

However Freedom of Information requests show that in 2013/14 HMRC netted, on average, just £2,240 per enquiry. In 2011/12, this figure stood at £20,339. The average time to close an IR35 case is 385 days, so it is highly probable that the cost of running some of these enquiries exceeds any eventual tax gain.

Regardless of the outcome of these proposals, HR and recruitment must work together to ensure that processes are put in place to guarantee that information is shared in a way which benefits valuable contractors – if the legislation doesn’t work for them, they’ll simply choose not to work for public sector – and that would be disaster for us all.

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