The future of IR35 in the public and private sectors

The reform to IR35 for public sector assignments is now reality. Despite huge effort by agencies and the contractors themselves, the beleaguered market remains in turmoil whilst the lack of compliance from the public sector continues.

From the start, HMRC were warned of the problems ahead. Despite concerns, often expressed by the public sector itself, HMRC blindly proceeded and we now see the result of their ignorance.

There are many reports of contractors leaving the public sector and growing recognition that the public sector has been damaged in the short term, from a migration of expertise and resource, at a time when the public sector needs to be at its very best.

There is no question that the market will stabilise over the next year or so, as the supply chain becomes more aware of the rules and their respective obligations, with new entrants joining the market that are happy to accept an “inside IR35” status. With contracts rewritten and new assignments agreed there will be greater clarity on status and some normality will return.

But the question of whether the public sector will be able to attract the necessary resources at the quality and seniority required to deliver services demanded by the economy remains highly uncertain. With fully experienced contractors voting with their feet they will only be replaced by the less qualified.

Of course, there are some that remain within the public sector. Many are demanding higher rates or improved terms to compensate for their losses and this must now add a further burden to the public purse. Budgets are tight and there are likely to be further cuts to services to balance the books. Did HMRC do its sums, was the impact assessment realistic? It’s very doubtful.

The status tool heralded as the solution to uncertainty is anything but, with the public sector ignoring the tool and making status decisions across the board. We must wonder what instructions were given to those public sector bodies, by Government, to warrant the approach taken.

Time will also tell whether the expected financial gains promised by HMRC to the Treasury will materialise, or whether the reality will be that any gain is more than covered by the additional costs to the sector.

Sadly, we cannot expect a U-turn from Government, but we should expect the future to mean the public sector will begin to meet its legal compliance obligations.

The question now is whether similar reforms will be applied to the private sector. HMRC has given mixed messages. But, if Government continues with its blinkered view of the market, the debacle we have witnessed over the last few months and the expected damage to the public sector will be repeated tenfold in the private sector.

It would be sensible to consider that the risk of reform to IR35 in the private sector at some point in the next 2 – 4 years is high. Whether reform mirrors the public sector change is debatable. Let’s hope some lessons are learnt. But for the workers the importance of getting the right contractual terms in place will be essential, and the supply chain needs to start responding to that need.

If the genuine Limited Company contractors, and there are many of them, can agree appropriate working relationships then the threat of IR35 reform will focus on the end of the market that may well not be suitable for Limited Company and return to Umbrella or employment proper. That would be our advice, pay attention to the contractual terms and seek co-operation from clients and the supply chain to document the true basis on which work is undertaken.

HMRC has been surprised by the migration from Limited Company to Umbrella, despite all their efforts in 2016 to curtail the Umbrella market with removal of tax relief on expenses. We can expect a further raft of measures from HMRC against Umbrellas as a reaction to this, and even more so if there is any intention to extend reform of IR35 to the private sector.