The roll-out of IR35 reform in the private sector today (6th April), has been described as a “historic moment” and one that has come at the “worst possible time” for freelancers and contractors.
IR35 reform shifts the responsibility for determining employment status for tax purposes (IR35 status) from contractors to medium and large businesses in the private sector. Small companies are exempt from the changes.
If a business decides that a contractor’s engagement is inside IR35, the fee-paying party in the supply chain is liable for deducting income tax and national insurance contributions (NICs) at source and paying this to HMRC. If the engagement falls outside the scope of IR35 then the contractor continues to be paid in gross and is responsible for their own tax.
The widely criticised IR35 rules were originally brought in by the Treasury in 2000 in a bid to tackle ‘disguised employment’ and stop contractors paying less tax.
The changes, which were due to come into force last year but were delayed due to the COVID-19 pandemic, are expected to raise £3 billion by 2024 for the Treasury. But with the pandemic having hit contractors particularly hard, industry experts are concerned IR35 reform will cause “chaos” and “unnecessary damage” to the sector.
Andy Chamberlain, Director of Policy at trade body, IPSE, said: “The changes to IR35 would do serious harm to the self-employed sector at the best of times, but now they are adding drastic, unnecessary damage to the financial carnage of the pandemic – undermining the UK’s contractors at the worst possible time.
“The crucial problem with IR35 is still its complexity: in fact, it is so complex that HMRC has lost the majority of tribunals on its own legislation.”
Chamberlain then added: “The result is clear: chaos.
“Many clients are pushing all their contractors inside IR35 – against the rules of the legislation. Many more are only engaging contractors through umbrella companies, while others are scrapping their contractor workforces altogether – just when, as the economy opens up, they will need them most.”
“And there remain serious doubts about the CEST tool HMRC designed to supposedly cut through this complexity – above all that it still does not account for one of the crucial deciders of IR35 status: mutuality of obligation.”
In fact, since 2017, HMRC has lost seven out of the 11 cases it has taken to court over IR35 non-compliance.
With regards to the Check Employment Status for Tax (CEST) tool, the tax watchdog’s own data revealed that it was unable to deliver an IR35 determination for nearly 1 in 5 users last year – this amounted to over 188,000 indeterminate answers.
Chamberlain argued that the complexity and the controversy surrounding IR35 shows that the UK tax system is not fit for purpose for the self-employed.
He said: “We are, crucially, also pushing for a root and branch review and reform of self-employed taxation in the UK.
“IR35 is not an isolated problem: it is a marker of a tax system that was not built with the self-employed in mind. It is this that has to change – to make IR35 redundant and finally make taxation fairer and simpler for the self-employed.”
Seb Maley, CEO at Qdos, added that while reform has led to fears about the future of contracting, he remains confident that this way of working will survive:
“The introduction of IR35 reform is a historic moment. It marks the culmination of years of the government chipping away at contractors, who have shown tremendous resilience and a determination to continue working this way.
“Despite IR35 reform, I am optimistic about the future of contracting. The economic climate, the changing makeup of the workforce and the growing demand for flexible, skilled and cost-efficient workers suggest contracting is here to stay in spite of these changes.”