Samantha Hurley, Operations Director at The Association of Professional Staffing Companies (APSCo).
* UK in danger of moving from being one of most flexible – to one of most inflexible labour markets in the world;
* A disaster for public sector talent supply;
* Fury at Government’s wilful disregard of all industry stakeholders and concerns of its own departments.
On IR35 Restriction:
“The government has announced that it is to introduce IR35 tax changes, which will result in Personal Service Company contractors in the public sector losing their right to determine their tax status. We are furious that the government has ignored all industry stakeholders and has overridden the concerns of its own departments. This change will give recruitment firms and other engagers, who pay the contractor, liability and responsibility for operating payroll and paying the correct taxes to HMRC.
These changes will convert the UK from having one of the most flexible labour markets in the world to having one of the most inflexible labour markets in the world.
Despite the government framing this as a duty on the Public Sector to ensure that those who work for them pay the correct tax, the reality is that the vast number of contractors work via recruitment firms and other engagers. In fact, it is these unconnected third parties that will bear the responsibility and legal liability for making the correct decision on tax status – namely whether the contractor is working in a similar way to an employee, and therefore liable for paying same taxes as an employee, which is an over-simplification of IR35.
This is a disappointing and illogical move. The public sector will inevitably see its costs rise at a time when budgets are already very tight. A survey of independent professionals undertaken in July this year by IPSE, a membership body for independent professionals and the self-employed, revealed that 39 per cent of respondents would work on public sector contracts but would increase their day rate to compensate for the extra tax liability. The same survey showed that over 50 per cent of respondents would refuse to work on public sector contracts – or would terminate contracts if required to pay tax and NICs as an employee when delivering services independently. We are already seeing the public sector’s access to talent being severely impacted – there have been walkouts from a Ministry of Defence Agency which has left several major IT projects on hold.
“The Chancellor has just promised large scale investment in infrastructure and science and digital innovation to the tune of £23bn over the next five years. However we would question how the public sector will deliver on this promise when HMRC has just destabilised the flexible labour market in the UK, which Government Departments and local& regional Government rely on.”
APSCo asks what assessment HM Treasury has made of the impact of these changes on the delivery of these projects. We would also be very interested to learn what assessment has been made on public sector labour productivity, which is already low, and could have a dramatic regional impact.
While HMRC has developed an online tool which it says will determine an individual’s tax status, we believe that the public sector, the accountancy profession and the recruitment sector are sceptical as to whether this tool can deliver certainty. Consequently most placements will be treated as within IR35 in order to mitigate risk- this is likely to result in multiple appeals and employment claims against the public sector.
We are also extremely disappointed that the Government has chosen to act now rather than take the more logical approach of waiting for the review of self-employment taxation announced today.”
On Infrastructure & Innovation Investment
“Although we welcome the announcement on the boost to funding for infrastructure and research and development to make the UK a ‘go to’ global destination for innovation in a post Brexit world, we are very concerned that this laudable aim will be defeated by the Chancellor’s short-sighted tax changes.
His failure to recognise the connection between our current flexible labour market and the Government’s aspirations for higher productivity will result in all these projects running way over budget and way over time.
The UK’s ability to prosper in a post Brexit world will depend on our ability to source highly skilled experts – often on a short-term contract – and on a just in time basis. We would seriously question whether these independent specialists will still be available?”
Julia Kermode, chief executive of The Freelancer & Contractor Services Association.
"As the representative body that is committed to setting standards and stamping out unethical practices, FCSA welcomes any measures that tackle disguised remuneration schemes. Such schemes have become more prevalent, some with particularly complex offshore structures, which entice contractors and self-employed by the high returns offered. It has become increasingly difficult for legitimate businesses to compete with these schemes, so we fully support the Chancellor's move to tackle them.
"However, we are outraged that the 5 per cent tax-free allowance for business expenses will be removed from off-payroll workers in the public sector. The new complexities around IR35 status means that professional contractors and interims will be forced into making deemed payments throughout the year, which in turn means that they will need more accountancy support going forwards to reconcile their financial affairs, and therefore more justification for the 5 per cent allowance. Once again the hardworking freelancers and contractors who are propping up the UK economy are being penalised.
"On the flat rate VAT scheme, we are not surprised that measures have been introduced by Mr Hammond today. We have seen an increase in structures being set up to benefit from the flat rate scheme so it was inevitable that action would be taken. It seems unfair that those operating legitimately will suffer, but in the current economic uncertainty this change represents significant gains to the Exchequer of £195m 2017-18 which cannot be ignored.
"We also welcome the news that the Government is aligning tax and national insurance and demonstrates that it has listened to the office of tax simplification, an independent body that is highly regarded and respected. Whilst there will be some winners and losers from the change, we welcome the move in terms of the overall simplification that will be delivered. Changing to an annual, cumulative and aggregated (‘ACA’) approach for calculating national insurance will be simpler for employers, and OTS research shows, that from the employee perspective, there will be more winners than losers. “
Crawford Temple, CEO, PRISM Association.
The key areas that directly affect the sector are:
1. Off Payroll Public Sector
As widely expected the government are pressing ahead with the changes to workers operating through PSC’s in the public sector. They have also confirmed that they will be removing the 5 per cent tax free allowance that currently exists within IR35 with the stated reason that the worker no longer bears the administrative burden of deciding their status. We suspect the remove of the 5 per cent is more to do with the feedback received from payroll software providers stating that they required at least 6 months’ notice of the final calculations to adapt their software. Removal of the 5 per cent means that all the income is subject to PAYE. Clearly there are still many hurdles such as what tax code should be used as the worker and their company are the only parties that receive this. Also we are already seeing suggestions that the payments under these arrangements could either be caught by the new apprenticeship levy or excluded from this and subject to a public sector specific levy. What is less clear is who will ultimately have to pay whatever the levy is.
This change will create a two-tier market-place with the public sector at a dis-advantage. The question is what next for IR35 in the wider context?
PRISM believes that these changes would have been more appropriate, if at all required, after a full review of the sector. Early reports from the Social Market Foundation, the independent think tank engaged by PRISM to carry out a review, suggest that there is not enough clear data to be able to draw any meaningful conclusions, let alone support changes in legislation. The SMF will be calling for all in the sector to help gather the data required to make a meaningful analysis before reporting their final conclusions in the 1st quarter of next year.
2. VAT Flat Rate Scheme
The government has introduced a new 16.5 per cent rate for businesses with limited costs. The definition of limited costs is:
One whose VAT inclusive expenditure on goods is either:
· less than 2 per cent of their VAT inclusive turnover in a prescribed accounting period
· greater than 2 per cent of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
· capital expenditure
· food or drink for consumption by the flat rate business or its employees
· vehicles, vehicle parts and fuel (except where the business is one that carries out transport services - for example a taxi business - and uses its own or a leased vehicle to carry out those services)
These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2 per cent
This will clearly catch many PSC workers who are registered for FRS and will be seen as another blow to them. It is also likely to have wide reaching impacts across many other businesses.
The effect of the 16.5 per cent rate is that it creates no gain for anyone on this rate so we would expect many to either deregister for VAT completely or as from the FRS as a minimum.
3. Countering Avoidance and Sanctions
Once again there were several mentions covering this area including confirmation of a new penalty for those that design and market tax avoidance arrangements that are defeated by HMRC. We also see that QC opinions are also not going to be considered as reasonable care placing much higher responsibilities on those marketing arrangements.
There was also confirmation that further investment will be made by HMRC in to increasing their activity on countering avoidance.
PRISM welcomes these measures and the increased level of compliance activity across the sector is already helping. PRISM have always believed that increased compliance not sticking plaster rule changes was what was always required.
4. Salary Sacrifice
Once again as widely expected the government will be closing the tax and employer National Insurance advantages of salary sacrifice schemes. These are not prevalent in the market but some have arrangements where workers can sacrifice income for benefits will be placed in the same tax position as those who can’t. There are exemptions relating to pensions (including advice), childcare, Cycle to Work and ultra-low emission cars.
IPSE, the Association of Independent Professionals and the Self Employed.
IPSE is seriously concerned at the developments for the UK’s freelance community in the Chancellor’s speech. The changes to rules on the intermediaries legislation, commonly referred to as IR35, are going to inflict irreparable damage to the public sector at a time it needs its contractors the most.
Chris Bryce, IPSE Chief Executive, commented: “The Government must now justify this decision. It has chosen to ignore the advice of the business and freelance community. We want to know why. It would be totally justified for contactors to walk away from the public sector.
IPSE is also worried that the Chancellor announced a consultation on how to increase the tax take from the self-employed.
Bryce continued: “There was no recognition for the immense contribution the self-employed make to the economy. Having trumpeted the lowest unemployment rate for 11 years, ironically the Chancellor has launched an attack on the group largely responsible for this record.
“IPSE will continue to fight for the contracting community which has been badly let down by a self-described pro-business Government.”