IR35 action “must not be lip service” for future PM

Pledges from prospective future UK Prime Minister Liz Truss to review the country’s IR35 legislation are positive but must be followed up with hard action to reform the system and support small businesses, market participants say.

“Whilst it is good to hear that Liz Truss intends to focus on IR35 as part of her vow to help small businesses, my message to her is loud and clear: we do not need another review, we need action,” said Dave , CEO of IR35 consultancy firm Shield.

Truss, the front-running candidate to take over from Boris Johnson as the  next Prime Minister, has the denounced the UK’s tax system as unfair and unrepresentative, arguing the current IR35 regime punishes the self-employed.

“The fact is, if you are self-employed, you do not get the same benefits as being in a big company,” she said in an interview with The Sun on in August 2022.

“You do not get paid holidays, you do not get those benefits. So, the tax system should reflect that more.”

The UK government originally introduced the IR35 off-payroll working rules in April 2000, with the objective to prevent tax avoidance by “disguised employees” providing services through an intermediary such as a personal services company (PSC).

In April 2017, the UK government sought to tighten the rules for the public sector. While contractors were previously responsible for determining their own IR35 status, the change meant the compliance burden shifted further up the supply chain to the end client.

The equivalent rule subsequently came into effect for the private sector in April 2021.

But according to Chaplin, the “so-called” reforms are a “flawed botch”. They simply serve to cripple contractors and the businesses that trade with them, he .

“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.”

“We’ve been here before”

This sentiment is echoed by Seb Maley, CEO at contractor insurance firm Qdos. Though Truss’ promise to review IR35 is “a step in the right direction”, this must not be a mere tactic to win the votes of contractors, he said in a press release

“It is impossible to overlook the fact that we have been here before. IR35 has been reviewed multiple times in recent years, yet still the government have taken very little or no action,” he said.

Maley also paints a damning picture of the current legislation, characterising HMRC’s status tool as “unreliable and inaccurate”.

The legislation is “forcing genuinely self-employed contractors into zero rights employment”, he adds.

This is further highlighted by research from the Association of Independent Professionals and the Self-Employed, which found that over a third (35%) of contractors have left self-employment since the changes to IR35.

Published in October 2021, the research also notes that four out of five contractors (80%) working inside IR35 said they had seen a drop in their quarterly earnings

Similarly damning is an MP-led report published in May 2022, highlighting the failure of public sector bodies to comply with IR35 tax reforms..

Produced by the Public Accountants Committee, the report states that government department agencies owed – or were expected to owe – HMRC £236 million in 2020-21 due to “incorrect administration of the rules”.

“It is widely accepted that IR35 legislation and the way HMRC enforces it is fundamentally flawed,” Maley adds.