The contracting sector needs to fight on all fronts if it is to stand any chance of preventing the proposed reforms to IR35 in the private sector.
This is according to Philip Ross, founding member of the Professional Contractors Group (PCG) – now known as the Association for Independent Professionals and the Self Employed (IPSE). PCG’s campaigning efforts achieved substantial amendments to the original IR35 proposals prior to its implementation in 2000.
“The success of our campaign hinged on technical and political pressure. We need to apply that same combination of pressure to Government and HMRC this time around. The former coming from contracting industry bodies and the latter coming from the contractors themselves.”
Proposals return IR35 to its original intended format
Formed to combat the original IR35 proposals, PCG’s relentless campaigning saw major changes to the legislation. In its original draft format, IR35 was to be operated by clients engaging contractors.
However, following intense lobbying, the legislation was altered so that this responsibility would lie with the contractors. 18 years on, Ross acknowledges that HMRC stands on the verge of finally getting its wish.
“The measures that Government has put in place in the public sector, and looks set on implementing in the private sector, is essentially reverting back to IR35 mark one.
“HMRC is adamant that incorporation is purely tax motivated, which of course it isn’t. This was proven time and again whenever PCG would challenge HMRC in court over IR35, as in the majority of cases PCG would come out on top.
“I think HMRC has realised this and is now hesitant to go to court for fear of setting case law precedents which it finds unfavourable, so instead it has decided to change the law to a certain degree.
“Because organisations being tasked with applying IR35 are more scared of HMRC than they are of pressure from contracting industry bodies, they are more likely to rule contractors as inside IR35. It’s a very contrived arrangement on HMRC’s part.”
History shows IR35 changes are not a done deal
Ross concedes that the battle is “half lost”, but insists that there is still a lot to fight for, whether or not the contracting sector itself believes so.
“I’m not feeling the same buzz. It doesn’t seem like people have the same belief that the changes can be prevented, which is what you really need in the first place to really kick off.
“The first step to beating IR35 is to win the argument, and there is plenty of evidence to show that IR35 in its proposed format is unworkable. The second step is making so much noise that Government has no choice but to listen, and that’s what we need to do next.
“You have to give the Government an opportunity to save face. Last time around our campaigning yielded an alternative that wasn’t as damaging for the sector. The same could still happen this time around. Change is definitely coming. It’s just a question of what that change will be.”
Contractors urged to rally against IR35 reforms
The evidence that Ross alludes to is the devastating impact of the public sector IR35 reforms. Whilst industry bodies have pitched this argument time and again, Ross says we shouldn’t expect Government to acknowledge this anytime soon.
“From a political standpoint, I don’t think they ever will acknowledge the damage caused to the public sector. The only way they would do so would be as a means of justifying the extension of the rules in the private sector - as a means of restoring parity.”
In addition to denying any negative effects on the public sector, HMRC remains adamant that the proposals will pay major dividends, estimating that £1.2bn can be raised over the next few years. Ross calls HMRC’s figures into question, and notes that its hard stance may have had a deterring effect on efforts to combat the proposals.
“If Government is going to claim such figures, it really needs to put some metrics in place showing exactly where this money is coming from. The concern is that wholesale tax changes are being made based on these mystery calculations.
“Government does seem hell-bent on getting these proposals through, but you still have to push back and do the same things that we did to amend the original IR35 proposals, which is to raise a lot of awareness amongst MPs. It may not always appear to be the case, but the more letters an MP receives, the more notice they will take.”
How PCG forced change to IR35
- Launched first ever e-petition to Parliament
- Mass lobbying efforts saw 800 campaigners visit Parliament
- Forced BBC’s Newsnight programme to correct and apologise for misleading IR35 story
- Campaigning saw roughly 2,000 letters sent to Ministers in the House of Lords
How can contractors overcome changes to IR35?
If the industry can’t secure a repeal of the proposals, contractors will have to find another way to overcome IR35. For Ross, doing so will require a seismic shift in the way contractors operate commercially.
“The commercial model for many contractors as it stands is very much geared around intermediaries such as agencies and umbrella companies, and people are treated as temporary professionals as opposed to being genuine freelancers. This needs to change. Contractors are going to have to start thinking about how they work, and who they work through.”
This ethos has been behind Ross’ launching the The Project Pool, what he describes as a consultancy and referral model for contractors and clients which can help mitigate IR35 risk.
“The Project Pool makes use of the professional networks contractors have online. It pairs contingent workers with projects without the intermediary. Working with a top accountancy firm, we have put together contracts which are clearly outside of IR35, and we are prepared to insure on this basis.
“Changes to IR35 won’t necessarily mean that all contractors are taxed as though they are caught. It just means they will have to work harder to secure and confirm their outside IR35 status. A change in the way in which people do their work will be critical to this.”
He concludes: “Instead of being treated as temps, contractors need to get into more business-type arrangements, where more bargaining power is exhibited, which itself helps to avoid IR35. With change there is obvious risk, but there is also opportunity. The onus will be on contractors to mitigate that risk and look for the opportunities that are there.”