Big changes ahead in the contractor market

There seems to be a general perception within HMRC that most, if not all, taxpayers are determined to avoid tax if ever they can.  If, like me, you have worked in public practice accountancy for many years, you will no doubt have come across some people for whom HMRC’s perception is absolutely right, but these people are in the minority.  The majority are far more concerned with making a living in whatever way they can, whilst ensuring they stay on the right side of the taxman.

Over the course of the last 20 years there has been a progressive move towards more and more flexible methods of working and this has inevitably placed pressures on tax legislation to keep up.  This does not mean that lots of taxpayers are deliberately playing the system to pay as little tax as possible, although there is a basic human right that we should pay no more tax than we have to, it is more fairly stated that taxpayers are struggling to match modern working practices with outdated, complex tax legislation.

Particularly within the fields of engineering and IT, there has been a trend in the last couple of decades for large employers to de-risk their payroll costs by laying off staff and re-engaging them as third party contractors.  This has led many individuals to have to get to grips with the vagaries of IR35 legislation and to accept the loss of employment rights and security.

HMRC’s perception is that only 10% of contractors working under these arrangements, who should be caught by IR35 (in HMRC’s view) are properly complying with the legislation. This is a long way from the truth in my experience, but I am only seeing a small part of the market of course.

Whether they are right or wrong, the upshot is that new legislation has been tabled to put the onus on the end client to make the call on whether the engagement is one that should be treated as a deemed employment for tax purposes.  This is inevitably going to lead to an overly cautious approach, resulting in many contractors being taxed as employees, but without having the associated benefits of employment rights.

This new legislation is expected to be implemented from April 2020 and those in the know are expecting this to go ahead, even if there is a change of government in the meantime.

For large and medium sized employers this is going to mean the need to implement wide ranging new systems and to renegotiate many (if not all) existing contractor relationships.  There may also be a cost implication in terms of an employer’s national insurance liability where previously there was none.

For contractors, this is likely to mean renegotiation of contracts and in many cases having to accept a lower after tax return from their efforts, as well as dealing with the extra compliance burden.

There will be pressure on some existing engagements to turn them into true employment relationships, but the desire to de-risk payroll has not diminished – in fact, quite the reverse.

I can see this causing significant disruption in the employment market and at some cost to the UK economy – just at a time when we need all else to be stable to withstand the shock of a possible no-deal Brexit.  We still have a few months to work to minimise this disruption, so we must use that time wisely.

If you want to discuss the practical implications of this, please contact Brian Jukes.