When new legislation is suggested or introduced by the Government, there will nearly always be winners and losers, those for and those against. Whilst some may tag the anti-lobby as doom mongers, their opinion is normally based on significant past experience and a deep understanding of those likely to be affected.
So, when the government announced the extension of IR35 into the public sector and then, from April 2020, the private sector, most accountants that deal with small businesses and contractors flagged the negative impact it was going to have. These small businesses and contractors have reportedly been the mainstay of the UK economy over the lost decade since the financial crash in 2008. We regularly hear in the media how they remain the constant, the lifeblood of the economy. They help bigger businesses manage headcount, avoid redundancies and in many cases enjoy slow but sustained growth which means more taxes and more jobs being created.
Anything which jeopardises the source of these new businesses or becomes an impediment to entrepreneurial thinking will therefore have an impact. Planned IR35 changes in the private sector appear to be just that and in February alone, I have been notified by two company clients of their intention to pack up and seek full time employment. It may be argued that if they feel that they are at risk of the planned IR35 changes then the government has a point in bringing in the legislation, because if you look at it on a straight case by case basis, they are probably paying less tax than an employee for ‘like work’ and similar terms. But this short-termist approach ignores the fact that those businesses could grow, could take on additional contracts in the future and could take on more staff, creating valuable new jobs. Just by leaving the comfort of permanent, contracted employment and going it alone, they have shown a willingness to take risk. And I know that in both these cases, the individuals involved had longer term plans to expand and build a business, it was a case of when, not if. But the punitive impact of increased tax bills, will absorb the capital that would otherwise have helped build the confidence in taking that next step.
The Government has identified that IR35 changes in the private sector will generate an additional £3bn between 2020 and 2024 and no one can deny that £3bn is a useful cash injection. However, I am left questioning what the cost benefit analysis looks like in terms of tax raised through IR35 versus the lost corporation tax, PAYE, VAT and supply chain investment these companies would have created over the same period and well beyond. Equally, if businesses cannot use contractors to manage head count, we may see a sharp rise in the number of genuine redundancies being made because FDs have no other choice than to cut posts and not re hire.
I long suspected that we would see a reduction in the number of new companies being formed and individuals making the leap to self-employment, post introduction of the IR35 changes in April this year. But to already be seeing existing companies winding up, is a move I had not anticipated. Yes, it’s only two at this stage, but we are still 5 weeks out from the introduction, and we are just one firm. If the same situation is playing out in the other accountancy firms across the UK then the picture is bleak.