Lessons from IR35 in the Public Sector and What it Means for the Private Sector in 2021

A flexible workforce is fundamental to successful business investment and economic growth. Is IR35 damaging the health of our economy and ability to recover from the current crisis?

Rose McCarter-Field

By Rose McCarter-Field

IR35 is designed to identify contractors who are avoiding paying the appropriate tax by working as ‘disguised’ employees, often through a Personal Service Company. However, the revised legislation inadvertently damages individual workers, business innovation and growth as well as our economy.

IR35 shows a one-size-fits-all approach from the Government which has been devastating to the public sector and in April next year is due to cause similar damage to the private sector. In an attempt to clamp down on tax avoidance, the legislation fails to consider the diversity of companies that drive our economy.

“Inside IR35” decisions make contractors more expensive, because employers’ National Insurance will be due. At the same time, the contractor’s take-home pay reduces, due to the deduction of PAYE tax and NICs. IR35 can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs. 

Any business forcing genuinely independent contractors inside IR35 is unnecessarily increasing their costs, while restricting their access to skilled workers. Since the implementation of the revised IR35 regulations in the public sector, they have been struggling to attract and keep hold of talented contractors.

A study by the CIPD and IPSE (Association for the Independent Professionals and the Self-Employed), found that 51% of public sector hiring managers thought they had lost skilled contractors because of these changes that were implemented in 2017. A further 71% are facing challenges in retaining their contractors.(1)

A study by the CIPD and IPSE (Association for the Independent Professionals and the Self-Employed). The impact of the revised IR35 legislation on public sector hiring managers.(1) 

Transport for London (TfL) projects rely heavily on contractors affected by IR35. TfL have experienced significant delays as a direct result of these regulatory changes. Chris Bryce, IPSE’s chief executive describes IR35 as “deeply flawed”. He reports that the legislation is damaging projects and people for whom the IR35 changes are not designed. These are not tax dodgers, they are people running innovative projects that drive our country and help our economy to grow.

Charles Cotton, senior performance and reward adviser at the CIPD, said the research suggested the IR35 amendments had resulted in “damaging unintended consequences” for the public sector. With the roll out of these changes into the private sector we can expect to see similar damaging effects.

“HR professionals have said they are finding it harder to recruit and retain skilled contractors, which is contributing to project cost rises, projects being delayed and, in some cases, projects even being cancelled,” Charles Cotton, senior performance and reward adviser at the CIPD.(1)

With a significant increase in unemployment levels and the introduction of furlough this year, our economy needs innovation to survive. The UK has furloughed more than any other country, our highest levels of furlough reaching nearly 30% of our workforce(2). Many of these jobs will become obsolete or significantly change in the coming months. 

People will be made redundant and they will have the option to return to the market selling their skills as freelancers or to retrain and develop their skills in new fields and start new businesses. IR35 restricts the attraction of this and furlough payments suppress the need for companies to make the difficult but inevitable decision now. In the US where the government has paid money directly to workers who have lost their jobs, they have created earnings breathing space for people to start up new businesses. As a result, there has been a record number of new companies popping up. Whether training yourself in a new skill or offering your skills out as a freelancer, tax law should be progressive and encourage this not punish it. It should not make companies afraid of engaging with small businesses.

Out of a recession comes innovation. Microsoft, Hewlett Packard, Amazon, Apple, Google, and Disney all started in a garage and are now worth more than the GDP of the entire UK economy. Government legislation should not be restricting our ability to invest and innovate, it should be encouraging us to do so. 

The global marketplace has dramatically changed in a very short space of time. We live in a new, digitised and socially distant marketplace. Companies and people need to adapt, fast. It is up to the Government to support any opportunity for innovation and investment. The faster we adapt, the faster our economy will recover. A flexible workforce is fundamental to this recovery.

 

    1. People Management https://www.peoplemanagement.co.uk/news/articles/ir35-damaging-unintended-consequences-
    2. public-sector-employers
      The Economist https://www.economist.com/leaders/2020/10/29/why-rishi-got-it-wrong