IR35 repeal U-turn a ‘massive oversight’

The UK government’s reversal of its decision to repeal changes to the IR35 rules will deal “a major blow to freelancers and contractors”, according to Julia Kermode, founder of freelancer support platform IWORK.

“The mini-Budget has been torn up and yet again it will be the self-employed who pay the price,” she said.

“Crippling indecision from this government has left millions of independent workers in limbo, unsure of whether they can pay rent, their mortgages and heating bills.”

As part of the UK government’s ‘Growth Plan’ outlined in September’s mini-Budget, the government had planned to reverse the 2017 and 2021 changes to the off-payroll working rules (IR35) in an effort to simplify the UK tax system.

But in a surprise economic statement on Monday morning, newly appointed Chancellor Jeremy Hunt announced that the government will U-turn on the decision.

According Seb Maley, CEO of IR35 specialist consultancy firm Qdos, the move to reverse the repeal of the IR35 changes is “the wrong decision at the wrong time”.

“It’s a knee-jerk reaction from the government and, in my opinion, won’t benefit the economy. IR35 reform damages the flexibility of the UK labour market, which is key to economic growth.”

IR35 reform in the public sector introduced in 2017 saw public sector bodies become responsible for determining the IR35 status of contractors – the responsibility shifted from the contractor to the end client. Alongside this, the liability shifted from the contractor to the fee-paying party (often the recruiter) in the supply chain.

IR35 reform in the private sector in 2021 mirrored this but applied only to medium and large businesses. Small companies remained exempt.

Many believe that the reforms have allowed tax avoidance schemes to thrive in the UK, posing a threat to contractors and the supply chains they operate in.

“IR35 reform has caused unnecessary complexity, leading to major issues for contractors, recruitment agencies and the businesses engaging these workers,” said Fred Dures, founder at umbrella payroll auditing provider, PayePass.

“By keeping IR35 reform in place and not delivering on promises to regulate the umbrella industry, this see-sawing government is failing the flexible workforce.”

Wave of reversals

Hunt also unveiled a raft of changes to the UK tax system, ditching almost all the measures announced in September’s mini-Budget.

While the reversal of the 1.25 percentage point rise in national insurance and the cuts to stamp duty have been retained, the Chancellor has scrapped:

• The cancellation of the corporation tax rise (from 19% to 25%)
• The removal of the 45% top rate of income tax for high earners
• The cut to the basic rate of income tax to 19p
• VAT-free shopping for non-UK visitors.

The wave of reversals has come after the disastrous market reaction to September’s mini-Budget, which ultimately led to Kwasi Kwarteng being removed from his position as Chancellor last week.

The value of the pound dipped to an all-time low against the dollar three days after Kwarteng’s statement. Shortly after, the Bank of England took the decision to launch a temporary bond-buying programme in a bid to stabilise financial markets.

But while the new measures are intended to help the government regain economic credibility, the Institute for Public Policy Research (IPPR) has argued that the danger could now “swing the other way” into austerity.

“Today’s statement leaves the door open for significant budget cuts to be announced later in the year, but these will be near-impossible to deliver in a way that’s acceptable to parliament and to the country,” said Dr George Dibb, head of the IPPR’s centre for economic justice.

“There is little fat to be cut from public services and other cuts would put at risk the government’s vital investment in growth. That would be disastrous for the future health of the economy.”