The Association of Recruitment Consultancies responds to the article in Computer Weekly on 13th July ‘IR35: Contractors demand tax and employment law alignment to protect ‘zero-rights’ workers’

Since the new IR35 rules came into force in April this year concern around tax liability has driven some hirers to ban the use of contractors operating through personal service companies (PSC), and others to issue blanket ‘inside IR35’ statements. The tax advantage that these ‘contractors’ have historically benefitted from has largely been lost.

In its drive to address tax avoidance this was HMRC’s objective. The result has been an increase in supply through umbrella companies and agency PAYE paid workers. There are some reports that direct employment of ex contractors is also on the increase.

As a reaction to this an argument has been evolving that PSC contractors should have employment rights where arrangements are caught by the new IR35 rules. The starting point for this argument is that where the arrangements are ‘within IR35’  the fee payer must treat the contractor company’s invoice (net of VAT and expenses) as a ‘deemed employment income’, namely as an equivalent  salary amount subject to PAYE and NICs.

This goes to the heart of  HMRC’s rationale. If you work as an employee, albeit via a PSC, then you should be taxed as an employee. So, following the changes, once the PSC tax advantage has gone, the rationale for using a PSC for that work also disappears.  Yet the argument posed seems to be that the contractor should retain the PSC but be awarded employment rights. This makes no sense. Those contractors who have previously operated through PSCs have the same choices as everyone else if they recognise there is no advantage in using the PSC for that work. That is direct employment by the hirer, employment or engagement by an agency, employment or engagement by an umbrella company. In all these scenarios the individual has a swathe of ’employment rights’ using the generic term. These rights include actual employment rights, worker rights and agency worker rights or a combination of rights dependent on the precise terms of the arrangement. Only if the individual insists on continuing to operate on that specific work via a PSC do many of these rights fall away. The argument is that these PSC contractors should have employment rights against someone since they are being paid net of tax.

Imagine the impact on contractor supply if employment rights were to be allowed by Parliament whenever a contractor wanted to work through a PSC! The whole advantage to a hirer of using contractors and temp workers is that they are not employees of the hirer. Raising the concept of employment rights for individuals because they elect to operate through a PSC simply creates unacceptable levels of uncertainty in the industry which could result in a total embargo on using PSC contractors, thus cooking the goose for everyone else.

The emotive term ‘zero rights contractor’ used in this context is a misnomer. There is no scenario in which the individual is a zero rights contractor, save where the individual makes the rare choice of operating through a PSC regardless of the IR35 driven net of tax payment. The idea that hirers may deliberately determine PSC contractor arrangements to be inside IR35 to gain a financial advantage, as suggested in the article, is also heavily flawed and not supported by any evidence.

In short, the call by contractors for employment rights where they are penalised under IR35 rules doesn’t live in the real world. The allied call for an alignment of employment and tax rules, used to support the argument, is a wholly different thing and is something the Association of Recruitment Consultancies  has been calling for this since 2016. However it has nothing to do with PSC contractor employment rights.