Despite heated opposition and warnings that it will actually reduce government coffers instead of increasing them, the British government is forging ahead with controversial new off-payroll working rules for tech workers at medium and large organizations in the private sector, which will come into effect in April 2020.
The draft legislation, dubbed IR35, will require organisations that hire contractors who supply services through an intermediary such as a personal service company, to make a determination of whether they would hire that individual if engaged directly (i.e. not through an intermediary). If so, then organisations must pay required national insurance contributions (NIC), and contractors must pay more income taxes.
In theory, the legislation is designed to eliminate what HMRC refers to as “disguised workers”. These are contractors who often or sometimes exclusively work side-by-side with fellow employees and participate in ongoing collaboration at work, yet pay significantly less income tax. Of course, these contractors do not have the same benefits as their employee-counterparts, but they stand to make up to 25 percent more money for performing the same amount of work — which for many, is an attractive trade-off.
In practice, however, IR35 is being heavily criticized by many tech contractors and tax policy experts, who say that the legislation’s historical application in the public service — where it was introduced in 2000 — has been anything but straightforward. This is largely because the inspectors and tribunal judges who ultimately determine if an individual is a contractor employee, are not themselves experts in employment law. This has led to confusion regarding definitions, terms of reference, and standards. There is also widespread belief that the (anonymous) online testing tool used to help individuals grasp whether they are an employee or contractor — called CEST (“Check Employment Status for Tax”) — fails to consider mutuality of obligations, and is inherently biased towards a finding of employee vs. contractor.
The other troubling implication is that once the new rules come into effect in April 2020, medium and large organisations will likely see a mass exodus of essential IT workers who, rather than lose up to a quarter of their salary, choose to take their job search to the EU where the need for technical specialists is strong and growing. Tech workers that choose to stay and have the leverage to do so are likely to raise their fees to offset the additional tax burden, which is something that organisations definitely do not want to happen — and some frankly cannot afford.
Consultations on the controversial draft legislation will continue until September 5, 2019, and measures will be added to the next Finance Bill.