Draft legislation for the public sector IR35 reforms was published yesterday and several firms have responded concernedly to the publication of the documents. IR35 legislation reforms were proposed recently during the Autumn Statement.

Julia Kermode, chief executive of The Freelancer & Contractor Services Association, commented on the publication of the reforms:

“I suppose contractors should be pleased that the draft legislation apparently includes measures to prevent double taxation of their income from public sector assignments, which would otherwise arise from a directors fee and dividend payments.  However there is insufficient detail on how this will work in practice – the director's fee attracts tax & National Insurance Contributions at source, dividends are subject to personal tax through an individual’s self-assessment tax return and until we have more clarity on the precise mechanism we do not know if double-taxation will actually be prevented”. 

“And that is not the only problem with the legislation.  As widely predicted, we are starting to see public sector hirers managing their new liability through a wholesale ban on engaging freelance professionals through personal service companies, in at least one case I've heard of the hirer is instead turning to consultancy firms at significantly higher cost to taxpayers.  Alternatively, we expect hirers to err on the side of caution to protect themselves, deem all contractors to be within IR35 and unfairly tax them as employees but without any of the statutory benefits that come with being an employee”.

“Furthermore, the draft legislation does not mention how contractors can appeal a hirer’s decision regarding their IR35 status so it seems that HMRC either doesn't anticipate any disagreements, or assumes contractors will simply accept the hirer’s decision in order to undertake a particular assignment. So it seems that HMRC is ploughing ahead with an ill-thought through move and has ignored the very many stakeholders in our sector who have raised some clear and common-sense concerns.  Clearly, those voices have fallen on deaf ears."

Dave Chaplin, founder and CEO of Contractor Calculator, also commented: “HMRC has not listened to the concerns of stakeholders and is pressing ahead with plans that will hit the public sector hard and throw the contracting sector into disarray.  What’s more, the new digital tool being developed by HMRC to ascertain with 100% certainty whether IR35 applies or not, is a naïve attempt to achieve the impossible.

“Building a tool that provides a simple yes/no result cannot be done due to the inherent complexity of employment status which lies on a spectrum. IR35 is based on complex employment status legislation and case law that dates back to the 1960s. Even experienced IR35 experts and HMRC inspectors can struggle with the law in this area.

“The future is very worrying for contractors, agencies, umbrella firms, hirers, accountants and tax insurers. HMRC can only really offer certainty for the most obvious outside IR35 cases, painting a false picture of reality for those that use it. Their tool will effectively scare public sector bodies into forcing contractors into false-employment, dramatically putting a brake on flexible working in the public sector as genuine contractors simply refuse this level of unfairness, vote with their feet, and instead only take on private sector work. Either that, or increase their rates by 20% to counteract the change.

“What’s more, for any public sector bodies hiring contractors into roles now, they do not even have HMRC’s tool available to them. How HMRC is going to achieve anything resembling the truth in time for April 2017 is anybody’s guess.”

“Contractors and everyone else in the supply chain want reassurance that they are working within the rules.  The whole sector is in for a painstaking year ahead as we have yet to see anything from HMRC that gives us confidence that its tool will provide “upfront certainty” on IR35.”