Forced onto the payroll

If the government wants the people that work for it to pay employment taxes, it should employ them

The government’s plans to change the way IR35 works in the public sector will be disastrous. There are more than a few reasons for this (which we spell out in our response to the consultation) but there is one aspect of the proposal that strikes us as being particularly unfair – the denial of employee benefits to those paying employment taxes.

The proposal is to make the public sector end client (or the agency) responsible for determining a contractor’s IR35 status. For those engagements deemed to be inside IR35, the client or agency will deduct tax and National Insurance at source, as they would for employees. But the contractor business, which is now absurdly being taxed as if it were an employee, will not receive any of the benefits and protections that come with employment.

That means no employer pension contributions; no holiday pay; no sick pay; no unfair dismissal rights – in short it means none of the rights that contractors have long been used to doing without. But now they will be paying taxes in exactly the same way as those they are working alongside and who do have access to these rights.

This will cause complexity, confusion and conflict. If people are taxed like employees it is likely, and not unreasonable, for them to expect employment rights. Contractors have never called for these rights in the past, but now denying them would cause tensions, which in all likelihood would lead to legal challenges.

IPSE surveyed contractors on this matter. We asked respondents how they would feel if they were to continue to work on public sector contracts and were required to pay the same tax and National Insurance as an employee, but not have the same employment rights.

To no surprise, 84 per cent thought this was unfair. Here is the breakdown:

  • 51 per cent think it’s unfair and would challenge their client on it
  • 19 per cent think it’s unfair and would consider taking legal action against their client
  • 14 per cent think it is unfair but would take no action.

Only three (three!) per cent felt this is fair, and would take no action.

The vast majority surveyed felt applying employment taxes without employment rights is unfair and almost one in five would be prepared to take legal action to address the issue. Over half would challenge their client on this point.

Employment status confusion

In pressing ahead with this measure, the government would be ignoring the findings of the Office of Tax Simplification in its 2015 report on Employment Status, which stated:

“This is a key point that needs to be explored: … there is an almost universal call for rules to apply to both tax and employment rights. That may not be possible given that employment rights follow from employment law and are outside the control of the tax authorities. But there would be huge benefits in harmonised rules and the possibilities need to be explored.” (page 9)

IPSE completely agrees. Government should consider ways to harmonise tax and employment status treatment when implementing any reforms, rather than driving them further apart. But in doing so it will also have to consider the impact awarding employment rights to workers would have on employers. It will create significant additional costs and burdens for businesses (that had originally intended to engage a contractor with no, or limited, employment rights).

IPSE also believes that where the engager (the client or agency), under the new proposal, determines the role is inside IR35 - and therefore has characteristics more consistent with employment – it should be filled by an employee.

Engaging a contractor, in full knowledge that the role is more suited to employment is ridiculous. Either it is employment or it isn’t. The government can’t have its cake and eat it. If you want employment taxes, employ people. If you want to engage a contractor on a flexible business-to-business basis, different (and not insignificant) taxes will apply.

The disadvantage of this fairer, more consistent, more logical approach, is that where the engager makes the wrong determination (which we believe it frequently will) it will unnecessarily rob itself of the flexibility, efficiency and specialist skills that contractor businesses provide. And this really cuts to the heart of the problem.

Take a stand

Contractors are good for the public sector. They offer expertise, flexibility and value for money. In implementing this proposal the government is cutting off its nose to spite its face. Contractors will not tolerate being taxed like an employee without receiving employee type benefits. So they will either challenge their client at a tribunal, or they will leave the public sector altogether. It really is madness.

We’re doing everything we can to stop this proposal becoming a reality. You can make a difference too - help us to stop this proposal by writing to your MP now.

 

 

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