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Contracting market stakeholders have expressed scepticism in response to Conservative leader candidate Liz Truss’s pledge to review the IR35 tax avoidance rules if she succeeds Boris Johnson as prime minister.
In a newspaper interview published over the weekend, Truss – who is currently foreign secretary, but has previously held the role of chief secretary to the Treasury – said she would order a review of the IR35 rules because they are forcing genuinely self-employed people to pay too much tax.
The IR35 rules and how they work in the public and private sectors have undergone reforms in recent years, with the government introducing changes that meant contractors were no longer allowed to decide for themselves how they should be taxed based on the work they do and how it is performed.
Instead, responsibility for making these decisions has shifted onto the public and private sector organisations that engage contractors, which are instructed by HM Revenue & Customs (HMRC) to use “reasonable care” when determining if a contractor’s engagement should fall in or out of scope of the IR35 rules.
An inside IR35 determination means contractors are considered to be employees for tax purposes, meaning they must pay the same tax as a permanent employee would. This means they are liable to make Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs). Whereas an outside IR35 determination means the contractor is taxed as an off-payroll worker.
One of the major and recurring criticisms of the rules is that while inside IR35 contractors are taxed the same way as employees, they are not liable to receive the same workplace benefits, such as paid sick leave or holiday.
As a result, concerns have been raised by MPs and campaign groups that this is contributing to a rise in the number of zero-rights employees, which is something Truss told The Sun on Sunday she takes umbrage to.
“The changes that have been made to IR35 are all about trying to treat the self-employed the same as big business,” she said. “But the fact is, if you’re self-employed, you don’t get the same benefits as being in a big company. You don’t get paid holiday. You don’t get those benefits. The tax system should reflect that more.”
She is also reported to have rallied against the unfairness of the rules, as they force genuinely self-employed people to pay too much tax, so – for this reason – she has promised a review of the rules if she comes to power.
Andy Chamberlain, IPSE
The pledge has been cautiously welcomed by the contracting community, but – given how many times the IR35 rules have been subject to government review over the years with next to no changes made as a result – expectations about what this might mean are low among industry watchers.
Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), said the organisation would welcome a review of the IR35 rules, which he said were “destroying businesses and holding back the economy”.
He added: “While it is positive to hear Ms Truss acknowledge the need to look again at IR35, we have had reviews before and none of them have led to anything meaningful. This review must lead to radical and tangible change. Nothing should be off the table, including scrapping this dreadful legislation altogether.”
Dave Chaplin, CEO of tax compliance firm IR35 Shield, echoed these sentiments and said while it was “good to hear” that Truss is championing the needs of small businesses, another review of the IR35 rules is unnecessary.
“We don’t need another review, we need action. The so-called reforms are a flawed botch and have simply served to strangle contractors and those businesses which hire them,” he said. “IR35 is an iron shackle, impeding flexible workers who can help deliver growth just when the UK economy and UK plc need them. The time to act is now.”
Shifting responsibility for deciding how contractors should be taxed on to the end-hiring organisations has led to widespread reports in recent years about organisations issuing blanket determinations, whereby all of the contractors they engage are ruled to be working inside IR35.
At the same time, there have also been reports of organisations banning the use of contractors completely as a way of side-stepping the additional administrative burden the reforms place on them, which has made it difficult for some contractors to find work.
The best thing Truss could do if she comes to power is to scrap IR35 completely, Chaplin said. “Over the last 20-plus years, there has been considerable misjudged and damaging legislation heaped on the contracting sector and the sensible option would be to go back to the drawing board and design a fair tax system that works fairly for everybody – the government needs to fix it or ditch it,” he added.
Meanwhile, Seb Maley, CEO of contracting authority Qdos, said news of a review of IR35 was a “promising” development if it were to be done properly.
Seb Maley, Qdos
“It’s widely accepted that the IR35 legislation and the way HMRC enforces it is fundamentally flawed. Liz Truss must make a review a priority if she becomes prime minister. But this mustn’t be lip service or a tactic to win the votes of contractors for whom IR35 remains a massive issue,” said Maley.
“It’s impossible to overlook the fact that we’ve been here before. IR35 has been reviewed multiple times in recent years, yet still the government have taken very little or no action whatsoever. So you’d forgive contractors and businesses impacted by the rules for taking Liz Truss’s pledge with a pinch of salt.”
And if the review does materialise, as promised, it must be conducted by an independent third-party and be far-reaching, he added.
“HMRC’s very own IR35 status tool is unreliable and inaccurate, which is a major risk to compliance. While the legislation is forcing genuinely self-employed contractors into zero-rights employment – a situation where they pay tax as employees but don’t receive any employment rights in exchange. Having specialised in this legislation since its introduction in 2000, Qdos stands ready to contribute to any review,” Maley added.