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Imminent IR35 tax changes could cost UK £2.2bn in lost productivity

New research has indicated that companies could potentially face a mass exodus of contractors when the new rules come into force in April

Vodafone Group plc - Imminent IR35 tax changes could cost UK £2.2bn in lost productivity

Changes to UK tax rules on 6 April for contractors could cost the economy up to £2.2bn immediately in lost productivity as self-employed workers perform a mass exodus to avoid paying extra.

IR35, also known as the ‘off-payroll tax’, is a piece of legislation that aims to crack down on ‘disguised employment’, where workers who bill companies for their services avoid paying income tax and national insurance despite being an employee of a firm in all but name. Instead, they usually hire themselves as companies and instead pay corporate tax rates which are often lower.

READ: Hays expects big hit from UK tax changes in April

While the regulation is aiming to close a loophole that effectively allows ‘quasi-employed’ people to pay less tax than other staff, businesses heavily reliant on freelancers have warned that the changes could severely dampen recruitment activity and economic growth.

According to a report released last week from online accountancy group inniAccounts, the IR35 changes could lead to a £2.2bn immediate cost to the economy, adding that just under 53% of self-employed individuals would prefer to leave their existing jobs immediately rather than accept the rules as the new normal.

The exodus could even be worse than this, with the data also showing that 66% of workers would be outside the new regulations, with only 9% currently within the new guidelines.

Companies that could be on the receiving end of a mass contractor walkout include telecoms group Vodafone PLC (LON:VOD), Barclays PLC (LON:BARC), GlaxoSmithKline PLC (LON:GSK) and the National Grid PLC (LON:NG.).

Those that have tried to adapt to the new rules, including Lloyds Banking Group PLC (LON:LLOY) and Deutsche Bank, have in turn faced the wrath of contractors after demanding they face pay cuts to address the imbalance with full-time employees.

Recruiters also at risk

In its half year results on Thursday, FTSE 250 group Hays PLC (LON:HAS) said it expected the IR35 changes “may lead to a hiatus in Temp activity in parts of the private sector”.

This echoed a warning given on Wednesday by Hays’ managing director in Scotland Akash Marwaha, who told the Edinburgh Evening News that a “key concern” among employers was a loss of talent following the changes in addition to difficulties in assessing which assignments given to freelancers could potentially fall within the IR35 rules.

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