The War on Contractors Must Stop, Prime Minister
On the 23rd July 2019, the United Kingdom will have a new Prime Minister. While Brexit occupies the thoughts of many people, there is another pressing matter for the new PM to examine. It concerns the work environment in 2019 and the rise of contracting in the IT sector and many others. In late June, ten organisations representing contractors and freelancers signed an open letter to then Rt Hon MPs Boris Johnson and Jeremy Hunt – the two top candidates from which The Conservative Party will choose its leader – to address these concerns.
The Open Letter to Jeremy Hunt and Boris Johnson
This letter highlighted how the current government has failed in its duty to address multiple issues for contractors and freelancers in the I.T sector and beyond. It detailed some policies that it felt actively undermine contract workers and their vital contribution to the economy. There are some hard-hitting statements and questions including an expression of bafflement that a Conservative Government “that has championed entrepreneurs and businesses” would create policies that actively harm contractors.
IR35 was controversial when introduced by then Labour Prime Minister Tony Blair. Ahead of the 2010 election, The Conservative Party said it would abolish IR35. It not only failed to do that in the nine years since, it has actually enhanced the law and proposed to expand the controversial measures. IT contractors and many others are deeply concerned.
Recent Policies have Undermined the Sector for Freelance Work and Contracting
The first issue of concern is the so-called Loan Charge. HMRC admitted to making mistakes in the 90s and 00s over loans that were never (and will never be) repaid. They are now asking government to retrospectively charge tax on those loans. The signatories to the above-mentioned letter feel HMRC has misled the cabinet and attempting to effectively punish others for their mistakes. Even legal professionals have said override statutory protections and undermines existing tax law.
The main controversial proposed change is to the so-called “off-payroll rules” and the Off-Payroll Tax, best known as IR35. Originally introduced for contractors hired by the public sector, the current government now plans to expand this to the private sector to businesses over a certain size. Warnings have come from many business organisations and representatives that this tax will damage UK business in what is already proving a delicate and difficult time, almost universally described as “unfair” on SMEs. For I.T especially, where contracting has stimulated the industry to greater heights, this is deeply concerning.
How IR35 is Flawed
The IR35 tax law gives permission to HMRC to treat fees that a business pays to another business in the same way they would treat a salary. Its creation had good intentions, to stop the process of something called “disguised employment” in the public sector. This is where individuals set up a business to take on work but are employees in all but name and not contractors. In May, in anticipation of these changes, I.T professionals made plans to slash the number of contractors and freelancers they hire.
Individuals with a registered business pay less income tax and it removes the sick pay, holiday pay, and NICs burdens for the hiring company. It is this practice that the government was trying to stop by introducing a 14.3% Off-Payroll Tax for those who use this system. This is not good for businesses, least of all for the freelancers and sole traders who have legitimate small businesses and are not disguised employees.
Further, for the last two years, responsibility for determining whether a business should be subject to IR35 T&Cs has been removed from the contractor to the contracting business (so far, the public sector body). In the interests of caution, they have subjected their business to IR35 when they have not needed to. As a result, they have paid more tax than they are due.
UK Modern Business Reliance on Contractors
For the last ten years, the UK has experienced unprecedented growth in the number of start-up businesses. Freelancing, contracting and small businesses have never been so important for the UK. In 2018, analysts recorded that start-ups were responsible for £221bn of the wealth generated in the UK economy. In 2015, it was estimated that 600,000 new businesses take off every year, including people registering as self-employed. Since 2008, the contractor and freelance environment has grown by 36% with no sign yet of a slowdown.
It’s clear that contract working in all industries will only continue to grow while there is still a demand for this type of working. It suits businesses of all kinds, especially those that prefer the flexibility. As businesses outsource their I.T needs, technology contracting expects to continue to experience this growth. It is believed that some businesses that provide these services will lose up to 25% of their income.