By Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield
Findings of an HMRC research report on the impact of the Off-payroll working rules on the contractor labour market, private sector and voluntary sector organisations are not painting an accurate picture writes Dave Chaplin. Just how much are the rules costing contractors and UK businesses?
HM Revenue and Customs commissioned research to explore the short-term impacts of the 2021 off-payroll working rules reform, sometimes known as IR35, in the private and voluntary sectors.
The off-payroll working rules were introduced in 2000 by HMRC to ensure individuals who work like employees, but through their own limited company (often known as a personal service company) or other intermediaries (i.e. umbrella companies), pay broadly the same Income Tax and National Insurance contributions as individuals who are directly employed. The rules were reformed in 2017 for the public sector and in 2021 for medium and large-sized private and voluntary sector organisations.
The rules, however, did not introduce like-for-like benefits for contractors, such as sick and holiday pay, even though they are expected to pay the same tax as the “directly employed” and join unregulated umbrella companies that charge weekly to monthly fees.
Choosing March 2020 as the baseline is somewhat of a statistical howler and means the report paints a less disruptive picture than what occurred in reality. Even then, though, it’s not pretty reading for HMRC.Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield
HMRC said the report’s main aim was to understand the possible effects of the reform on workforce structures, contractor rates and vacancies, and experiences of implementing the reform for private and voluntary sector client organisations. It follows research into the short-term and long-term effects of the reform in the public sector, which was published in 2018, 2021 and 2022.
Among group-level organisations, the HMRC report said that two-fifths (41%) had engaged fewer off-payroll contractors in September 2021 than in March 2020, compared to 35% that engaged the same number and 23% that engaged a greater number.
Approaching half (47%) of establishment-level organisations had the same number of off-payroll contractors in March 2020 and September 2021, with one in three (29%) having decreased the number and one in five (21%) with an increased number.
Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield, provides his assessment of the report:
“Many of the comparative figures in this report are flawed. This is because on 18th March 2020, at the first reading of the Finance Bill, Steve Barclay, Chief Secretary to the Treasury, announced that the Off-payroll reforms would be delayed by a year. With only three weeks until the expected roll-out date, most firms had already changed their workforces. Therefore, the periods compared in this report of March 2020 to September 2021 do not provide an accurate picture of the before and after scenario.
Choosing March 2020 as the baseline is somewhat of a statistical howler and means the report paints a less disruptive picture than what occurred in reality. Even then, though, it’s not pretty reading for HMRC.
In point 1.27, the research reveals that about half the organisations did not find it easy to comply with the reform, and those finding it difficult were in instances where contractors operated in highly skilled and regulated professions. Isn’t that pretty much all contractors?
44% of firms said it was more difficult to recruit off-payroll workers. What is UK Plc’s cost for firms wading through the legislative sludge?
The claim that up to a quarter of firms only incurred up to £999 cost to implement the reforms does not tally with the figure that over half of the firms had external legal help or lawyers. You won’t even get one day of a lawyer for £999. We know firms that spent more than six figures.
The business costs are perhaps better summed up by the quote that contractors are increasing their rates by up to 35%.
This HMRC-commissioned report indicates that the average cost of implementation per firm is just over £4,000. For 60,000 firms, this equates to £240m, seventeen times more than HMRC’s estimate in its impact statement.
In the original impact statement by HMRC, they estimated that the one-off impact on the administrative burden to 60,000 businesses would be £14.4m and that the ongoing cost would be negligible:
This HMRC-commissioned report indicates that the average cost of implementation per firm is just over £4,000. For 60,000 firms, this equates to £240m, seventeen times more than HMRC’s estimate in its impact statement. For the ongoing cost, HMRC’s impact statement indicated that this would be £5m, offset by savings, making it negligible. However, the report states that the average monthly cost is around £500, equating to £360m per year, 72 times more than HMRC’s estimate.
This annual cost to UK business demonstrates considerable friction has been added to the flexible workforce, which will cost UK Plc. Questions need to be asked in Parliament as to why HMRC got this so wrong.”