Further to our previous article, the repeal of the 2017 and 2021 IR35 changes that was announced by Kwasi Kwarteng in his ‘mini-budget’ on the 23rd September 2022, have now be abandoned by the Government. The IR35 repeal u-turn was announced by the new Chancellor of the Exchequer, Jeremy Hunt, during his statement on the medium-term fiscal plan on the 17th October 2022.
IR35 Repeal U-Term
A full explanation of what IR35 (aka the off-payroll working rules) is, and what the 2017 and 2021 changes were, are set out here and here. The IR35 changes were rolled out to the public sector back in April 2017, and were then extended to the private sector to businesses with 50 or more employees on the 6th April 2021.
Nevertheless, on the 23rd September 2022, the then Chancellor of the Exchequer, Kwasi Kwarteng, announced that the 2017 and 2021 IR35 changes would be repealed in his mini-budget. He stated: "In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses. So as promised, by the prime minister, we will repeal the 2017 and 2021 reforms."
The repeal of the 2017 and 2021 IR35 changes would have meant that the regulations would have reverted back to the originals rules, with contractors assessing their own tax.
Nevertheless, Kwarteng was replaced as Chancellor of the Exchequer by Jeremy Hunt on the 14th October 2022. Hunt then announced the IR35 repeal u-turn in a statement on the medium-term fiscal plan on the 17th October 2022.
The IR35 repeal u-turn was one of multiple u-turns by the Liz Truss Government, prior to her resignation as Prime Minister on the 20th October 2022. Her resignation makes her the shortest serving prime minister in UK history. The previous record was held by George Canning, whose term as prime minister came to a premature end on the 8th August 1827, after just 119 days, on account of his death from pneumonia.
Injustice
The IR35 repeal u-turn represents an appalling injustice. Indeed, one of the main injustices arises out of the lack of alignment of employment status with tax status. Employment status determines the extent of an individuals rights in the labour market, as well as the taxes both they and who they work for have to pay. However, what complicates matters is that whilst there are two tax statuses – self-employed and employed, there are three labour market statuses, each of which come with different rights: self-employed, worker, and employee. This lack of alignment has been the subject of considerable criticism. The differences between the various statuses is set out here.
One injustice this lack of alignment creates is that those who now have to work within IR35 have to pay the same rates of Income Tax and National Insurance as employees, but at the same time do not benefit from having any actual employment rights. That is, they are treated as employees only for tax purposes, without having the same status within the labour market.
The CEO of Qdos, Seb Maley, points out that: “IR35 reform has seen tens of thousands of genuinely self-employed contractors left with no choice but to work inside IR35, where they are taxed as employees and can pay anything up to 30% more in tax. Yet still, these workers will not be granted employment rights in exchange. If now isn’t the right time to align tax and employment status, when is? Refusing to abolish what’s known as ‘zero rights employment’ is unjust, illogical and a huge oversight.“
What adds to the injustices of the IR35 repeal u-turn are the problems encountered with the Check Employment Status for Tax (CEST) tool, widely regarded as defective, with 42% of assessments found to be inaccurate. Indeed, the Government has been humiliated 3 times over IR35 failings by its very own departments and agencies, failings which have all been traced back to the deficiencies of the CEST tool.
Disastrous Economic Impact
The IR35 repeal u-turn means that the 2017 and 2021 IR35 changes will continue to have a highly damaging economic impact. Indeed, an IR35 Shield survey conducted prior to the IR35 repeal u-turn found that 65% of contractors had stated that some firms had reduced their use of contractors by more than 50%, whilst 47% reported that some firms had banned the use of contractors altogether. 58% of contractors stated that some firms had moved work abroad, whilst 35% reported that some firms had cancelled projects altogether.
A separate report from the Association of Independent Professionals and the Self Employed (IPSE), also conducted prior to the IR35 repeal u-turn, found that 35% of freelancers had abandoned self-employment altogether.
IR35 Repeal U-Turn Is Counterproductive In Its Objectives
Not only will the IR35 Repeal U-Turn have a disastrous economic impact, but it is counterproductive in its objectives.
In his statement on the medium-term fiscal plan, Jeremy Hunt stated that the IR35 repeal u-turn would save the Government £2 billion a year. However, that so called saving is not only being obtained as a result of an appalling injustice, but by ruining the lives and livelihoods of millions of contractors / freelancers.
Moreover, the suggestion that £2 billion per annum will be saved is a complete and utter nonsense. Far from increasing the tax take, the IR35 repeal u-turn will reduce it, as it completely undermines what was once one of the UK’s key economic advantages – its flexible labour market. Prior to the 2017 and 2021 changes, contractors could be taken on and let go as and when required, making the resourcing and implementation of projects more viable and manageable. This is no longer possible under the revised IR35 rules, thereby making projects more expensive and risky. The net effect of that is to stifle economic growth, thereby reducing the tax take in the process.
