Falling but certainly not extinct: IR35 will hamper vital post-coronavirus economic growth

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Economies around the world are suffering from the spread of the coronavirus. In the UK alone, almost 20% of small and medium-sized businesses are unlikely to survive in May, despite unprecedented government support.

The UK is home to 5 million self-employed workers; a community that may have felt the impact of the coronavirus more than any other.

The Treasury's “Self-Employed Income Support Plan” is committed to protecting the self-employed by providing up to 80% of an individual's average earnings or profits to those who are eligible for up to three years. month. While unquestionably essential, this support is expected to cost tens of billions; a cost that will have to be financed through the government's massive debt.

At the moment, it's hard to look beyond the coronavirus and the immediate problem of how to keep our economy alive. However, when travel restrictions are relaxed and daily life returns to a semblance of normalcy, the UK will need the independent community to thrive. First, for the benefit of the millions of self-employed who have taken up residence in the UK. Second, to increase government revenues in tax returns from this same workforce to ensure that the state is able to maintain vital services.

Law reform may not be anyone's priority right now, but it won't be long before we talk about how to get the economy going.

What is IR35?

In essence, the IR35 is a piece of British law designed to reduce tax evasion of self-employed workers that the HMRC considers “disguised employees” and the organizations that employ them. “Disguised employees” are people who work the same way as full-time employees, but charge for their services through their limited companies to make their businesses as tax efficient as possible.

While the majority of these agreements are authentic, some organizations pay people this way to avoid paying employers' national insurance premiums or providing benefits. Likewise, “disguised employees” who receive payments through their public limited companies earn higher income by not paying national insurance contributions.

Where are we?

The IR35 has been in place since 2000. As it stands, public sector employers must decide the employment status of a worker while in the private sector, workers who bill via a public limited company must decide of their employment status.

In late March, government decided to postpone IR35 reforms for 12 months until April 2021 to avoid putting additional pressure on self-employed and small business owners already struggling with coping to the coronavirus pandemic.

From April 2021, medium and large size private sector employers will be responsible for deciding the employment status of a worker and deducting national insurance contributions from a worker's salary.

The proposed updates are designed to ensure that the self-employed working through their public limited companies, doing the same work as an employee, pay the same overall tax and that employers pay national insurance contributions and grant benefits to employees accordingly.

Why is this change important?

While the ideas behind the IR35 updates are sound, there is concern that the reforms may have unintended consequences.

One concern is that businesses will be reluctant to work with self-employed workers because the tenant will be fined if they incorrectly identify someone as a self-employed worker. In fact, in order to avoid this, certain public sector organizations, including the HMRC, the NHS and the MOD, already have a policy of not working with self-employed workers.

Another concern is that overly cautious employers can automatically deduct PAYE and national insurance, so that the self-employed earn less than they are actually entitled to and must withhold tax.

In addition, freelancers deemed to be employees will have to pay more taxes, although they do not necessarily get the same benefits as existing employees.

Finally, it is likely that the proposed reforms will deter people from starting their own businesses. Self-employed workers enjoy flexibility and higher wage rates than employees, but reforms should eliminate both of these incentives.

Looking to the future

It is feared that the deployment of IR35 reforms in 2021 will hamper the recovery of the independent sector and the recovery of the British economy after the coronavirus.

Before the coronavirus, the independent economy was booming due to demographic changes, technological advances and changes in work paradigms. Indeed, our recent survey of more than 7,000 freelancers showed that Generation Y and Generation Z represent the vast majority of the world's independent workforce (almost 90% percent of those surveyed), highlighting how the role of young self-employed people in the future workforce is important.

Freelancers themselves say they have more autonomy and flexibility, while companies that hire freelancers gain the ability to easily scale and connect with the best talent from around the world. As the barriers for businesses and freelancers to work together have come down, we have seen incredible growth in economic opportunities on both sides of the equation.

As companies seek recovery from the coronavirus, the ability to hire freelancers smoothly, as demand ebbs and flows will be greater than ever.

In addition, the possibility of doing ad hoc work as a freelancer may well allow workers to earn income when full-time jobs are simply not available.

The IR35 reforms threaten to add complexity and anxiety to the flourishing relationship between the self-employed and the company. The decision to essentially reclassify some of these freelancers as staff risks hampering the lasting success of the independent economy and could have far-reaching consequences around the world. This is particularly important given that the global economy will need all possible stimulants as we rebuild from the coronavirus, and that remote working becomes a reality for many. The agility and dynamism of the independent sector as a truly modern industry means that it could play an integral role in the global recovery.

In theory, this extra time should allow companies to put in place fair procedures so that they can avoid blanket bans on working with the self-employed, but if the public sector has to pass, there is no guarantee that will happen.

In conclusion

The government's desire to simplify and streamline our tax system and generate additional income is to be welcomed, but this cannot be done at the expense of future economic growth.

In the coming years, companies will not want to be challenged by tax authorities as to whether a self-employed person who runs a digital marketing project, for example, should be classified as an employee because of the length of his contract .

The government must take the time to review the IR35 and update the instrument to alleviate the fears of freelancers and businesses. If the UK wants to recover and move on after the coronavirus, we cannot afford to put up barriers in our own way.

James Allum is Vice President and Head of the Europe Region at Payoneer

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