By Gareth Biggerstaff, CEO, Be-IT

THE taxman was left with a bloody nose in March after losing a £1.2million case to ITV presenter Lorraine Kelly. HMRC moved against the daytime star under IR35 legislation as part of a crackdown on personal service companies, which she used to manage her earnings. They claimed Kelly should have paid income tax and National Insurance contributions as the nature of her work with ITV meant she was effectively an employee. The court disagreed.

But by this time next year year you won’t have to be a highly-paid TV personality to have the crosshairs of IR35 focused on your finances. Indeed, April 2020’s wider rollout of the legislation looks set to slip a straitjacket on the labour market at the exact moment it needs to be flexible to cope with whatever fallout Brexit brings. HMRC is effectively nailing one foot of the economy to the ground as it tries to get back into the race by subjecting the self-employed to the stranglehold of IR35. Whilst we know the date of implementation we do not yet know the details as to how this will be rolled out.

The taxman’s record in this area is not one that fills you with confidence. In 2018, the last expansion of IR35 to cover off-payroll workers in the public sector, was a debacle, characterised by poor communication and panic. HMRC only issued guidelines of how the expansion would work a matter of weeks before the new financial year was due to start.

The bungled lead-in time severely limited preparation and there was little understanding of how the expansion would affect labour costs, which in some areas went up by 25 per cent due to the known tax increase that affected some contractors. The talent pool available to the public sector also shrunk, with many contractors simply opting to work only in the private sector, avoiding the hassle of IR35. So far there’s no signs any lessons have been learnt.

The driver for the original introduction of IR35 by Gordon Brown in 2000 was a rapidly-changing labour market in which the number of employees was reducing and big growth in the self-employed sector and in temporary workers.

IR35 was designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. However, the process of assessment is flawed, inaccurate and open to subjective opinion being applied rather than clearly defined factual based rules.

Almost two decades on the demand for these workers is as high as ever and growing due to the flexibility they offer business. All sectors want them. It’s not just the gig economy we are talking about, contractors are civil engineers, they are hospital consultants, and skilled IT workers. If you are a big PLC these workers keep the head count low, remove long term liability and therefore provide greater flexibility.

The expansion of IR35 will suffocate the labour market and shrink the talent pool with contractors seeking and being encouraged into permanent positions which in turn will reduce the long-term flexibility of our world class labour market.

With HMRC dishing out bigger tax bills and significantly greater associated administrative overheads for all in the labour supply chain, costs are going to go up. Added to that there will also be an increase of people trying to operate outside IR35, adding to the already cumbersome collection burden.

Tax needs to be fair, consistently applied and transparent. This latest chapter in IR35 will only add to a woeful story that will have wide reaching affects for the labour market and the economy.