The major recruiting companies have requested a delay and rethinking the upcoming tax changes in the UK which they warn will damage growth in the sector and increase tax avoidance.
Companies including Adecco, Harvey Nash, Hays, Reed and ManpowerGroup wrote to Chancellor Sajid Javid on Monday to urge him to think twice about changes to the rules for off-duty workers, known as IR35.
Freelancers who bill for their services through a public limited company currently assess whether they are employed or self-employed for tax purposes. But from April, all large and medium-sized businesses in the UK will be required to assess the employment status of the contractors they use, to address what HM Revenue & Customs calls “masked employment”, where workers and businesses avoid paying income tax and national insurance.
HMRC estimates that only one in 10 people in the private sector who should pay taxes under the current IR35 rules are doing it correctly. Reforms are expected to lead to £ 3 billion over the next four years.
The changes will mean that hiring companies and anyone involved in the labor supply chain, such as employment agencies, will be liable for unpaid taxes if HMRC finds that a worker has been incorrectly classified. Investors will need to demonstrate that they have taken “reasonable care” in assessing their contractors or risk being held liable for any national tax and insurance shortages.
“Companies need reassurance that the reforms will be fair and clear and will not leave them vulnerable to unnecessary tax risks,” said the letter, which was coordinated by the Confederation Recruitment & Employment, a commercial entity. “We are already seeing examples of projects that have been won and that the work is being taken to the open sea, damaging growth here and ultimately taking taxes.”
The companies also asked for an independent president to lead the current government review of the reforms. He added that the scope of the review should be “much wider” than a review of policy implementation at the present time.
Tax experts say hiring agencies will be particularly affected by IR35 reforms because they will not be able to change contractor assessment decisions made by rental companies. But they will still be responsible for any errors.
Julia Kermode, CEO of the Freelancer & Contractor Services Association, said: “If the [hiring] the client decides that someone is outside of IR35, the agency should not deduct the employer’s taxes and national insurance, but if HMRC later detects that the client was wrong but took due care, it is l agency that has financial responsibility for that tax. . . it is completely unfair. “
Some recruitment agencies, especially smaller companies, may not function if they have large responsibilities, he added. In this situation, their liabilities could be returned to others in the supply chain, including rental companies.
Seb Maley, CEO of Qdos, which provides insurance and tax advice to contractors, said the recruiters are in an “unenviable position”.
“The reforms are causing a severe headache for recruiters and agencies and have the potential to be very harmful,” he added.
In the letter to the chancellor, the recruiting companies also said that introducing reforms before the regulation of so-called umbrella companies would create “enormous tax avoidance opportunities”.
Umbrella companies work by collecting a contractor’s earnings from their rental company or recruitment agency and then paying them to the contractor after deducting taxes and national insurance. But the industry is unregulated and includes hundreds of companies that claim to be umbrellas, but which are basically fronts for tax avoidance systems.
Two years ago Taylor Review in modern working practices recommended regulating the umbrella industry; that the government has accepted. However, new legislation has not been approved.
A Treasury spokesman said: “Our changes to overpaid work ensure that people sitting side by side and doing the same job for the same employer pay the same national tax and insurance contributions.
“We have extensively consulted the details of the reform since the announcement in October 2018 and are now reviewing the reforms, working with stakeholders to see what further actions we can take to ensure their proper implementation.”