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Recruitment Firms Challenge UK's Proposed IR35 Reforms

by Robert Lee,, London

10 August 2015

Proposed changes to the UK's intermediaries legislation (IR35) would be a disaster for the flexible recruitment sector, the Association of Professional Staffing Companies has said.

IR35 was introduced in 2000 to tackle the avoidance of employment taxes by those who work through intermediaries. It requires individuals working through an intermediary to pay broadly the same tax and National Insurance contributions (NICs) as if they were providing their services directly. Last month it was announced that HM Revenue and Customs (HMRC) would start a dialogue with businesses on how to improve the effectiveness of IR35. The Government believes the legislation is not working as effectively as it should be and that non-compliance is widespread. It estimates that non-compliance with IR35 will cost the Exchequer GBP430m (USD666.3m) in tax and NICs receipts this year.

It is not the Government's intention to widen the scope of IR35 and it is envisaged that any change will be for income tax and NICs purposes only. One option for reform would be to require those who engage a worker through a Personal Service Company (PSC) to consider whether IR35 applies and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees. According to a HMRC discussion document, the Government recognizes that this would increase the burden on engagers (such as end clients or recruitment firms) and would welcome views on how the proposed new process could be made as straightforward as possible.

Samantha Hurley, Head of External Relations and Compliance for The Association of Professional Staffing Companies, described this proposal as worrying. She said: "In reality this would mean that if the engager decides that the worker is outside IR35 but HMRC subsequently decides they are inside, the engager would be liable for any outstanding employment taxes or National Insurance contributions. This is obviously a big commercial risk and the result is likely to be everyone erring on the side of caution – a huge increase in false employment, an upward pressure on rates as contractors look to recoup lost income – and in the worst case, a loss of skills to other overseas locations."

"While no one would argue that there is a tax benefit to operating as a PSC, there is also a risk. Contractors operating through this model have no employment protection rights – and have no certainty of continuity of work. If HMRC is, as it says, trying to create a level playing field, they will only ensure more of an inequality than exists currently. I cannot emphasize strongly enough the devastating effect this would have on the UK professional flexible recruitment market – and the UK's ability to compete in a global market and we will be responding in the strongest possible terms."

TAGS: individuals | compliance | tax | business | accounting | employees | United Kingdom | contractors | legislation | social security | HM Revenue and Customs (HMRC) | revenue statistics | tax reform | trade association | HM Revenue and Customs (HMRC) | trade | individual income tax | services

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