In April 2017 the new IR35 tax changes came into force and there are already serious warnings about the potential consequences. It looks like a pay cut for many and will affect how you complete your self assessment tax return too.
What is changing?
Previously, all agency workers were responsible for declaring and paying their own income tax and National Insurance Contributions.
This year’s change means that public sector employers become responsible for directly deducting NIC’s and tax from their agency employees’ pay. The result could be a 30% fall in their overall ‘take-home’ pay. But they will not be entitled to the same rights and benefits as other employed workers.
Why is the government imposing this change?
Government reasoning is that they are losing £400m in tax revenue from the ‘estimated’ 90% agency workers who are not paying enough tax. This IR35 change has been brought in to combat this loss in the public sector.
Who will be affected?
The tax change will affect every agency worker who has a role in the public sector. This includes: schools, NHS, social care, armed services, TfL, higher education organisations, councils and the police.
Anyone with a contract of employment in a public sector job is not affected (if you are on the official payroll). This includes part time workers.
It does not apply to you if you are doing exactly the same job in the private sector.
Potential Consequences
As reported by Diane Taylor in The Guardian, local government analysis is already warning of the dangers involved with this policy change. There is the very real likelihood that affected agency workers will simply leave the public sector for an equivalent private sector job. And they take their skills and experience with them. It will not be easy to make up such a large shortage of expertise.
This may well lead local authorities having to increase their budget spend on salary, just to keep existing staff.
Expert opinion
There is not a lot of support for this new tax change.
The law
A well-known tax barrister, Jolyon Maugham QC, told The Guardian: “I was told by a very senior Treasury source that the government wouldn’t have got the proposals across the floor of the house if they introduced them for the private sector too. This change is going to have the effect of driving up costs in the public sector. The area where this is going to have the starkest effect is the NHS. Many doctors and nurses are going to seek to work more in the private sector and that’s going to create a problem in the NHS, which as we know is already struggling to fill positions.”
Recruitment agency
A recruitment agency called Green Park successfully matches their workers with public sector management roles. Their managing partner, Neil Lupin, is already seeing the consequences: “There is no doubt that the unintended consequences of these changes will be profound for local authorities and other public sector bodies. New assignments for work inside IR35 are already being priced 15-20% higher. Those costs will place an increased financial burden on the public sector and destabilise the recruitment market.”
Tax justice network
The Tax Justice Network investigate and advise on tax system injustices internationally. Their comment from Alex Cobham is very interesting: “This looks like the worst kind of populism by government. It has been badly done and badly targeted. It is not likely to make the tax system fairer and may have adverse consequences. It seems misguided and it is difficult not to think it’s politically motivated.”
A petition
Gareth P Rowell has set up a petition to parliament in an attempt to have the changes to the IR35 tax rules considered for debate in parliament. He has done this because: “This will severely reduce the income of such individuals but confer none of the rights and benefits of a staff employee.” The petition needs 100,000 signatures to be considered for debate and currently has over 30,000.
HMRC
HMRC have commented on the worrying potential consequences of this change: “It’s fair that two people doing the same job should pay the same taxes and these reforms will help ensure that contractors pay the correct tax.”
They did not offer any comment about if and when their new online tool to support public sector employers administer this change would be up and running. They also declined to comment of whether damage to the workforce and increases to public sector costs had been assessed.
