Conservative Party MP, Sir John Redwood has called for the 2017 and 2021 IR35 changes to be repealed in the forthcoming Budget on the 15th March 2023.
IR35 Changes: Background
A full explanation of what IR35 (aka the off-payroll working rules) is, is set out here and here.
With effect from the 6th April 2021, IR35 was extended to businesses with 50 or more employees in the private sector. This followed its earlier implementation into the public sector on the 6th April 2017. With the introduction of the IR35 extensions, those managed and directed in how they carry out their duties and responsibilities, and who use the equipment of those that have hired them, were deemed to be employees and they must now go on to the PAYE payroll.
Government Objectives
The Government’s objective behind the IR35 extensions was to clamp down on what is referred to as ‘disguised employment’, where those who are in reality employees are made out to be self-employed contractors, often using personal services companies as a vehicle, so as to avoid paying the additional taxes and national insurance contributions that come with being an employee.
Disastrous Impact
The impact of the 2017 and 2021 IR35 changes however has been completely disastrous for the economy.
To begin with, the IR35 changes have undermined the UK’s flexible economy, in that previously the use of contractors who could be taken on and let go as and when required, made the resourcing and implementation of projects more viable and manageable. This is no longer possible under the new rules following the IR35 changes, thereby making projects more expensive and risky.
CEST Tool
There have also been enormous problems with the Check Employment Status for Tax (CEST) tool, which is 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.
Surveys
Moreover, an IR35 Shield survey conducted following the 2017 and 2021 IR35 changes 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.
Furthermore, a separate report from the Association of Independent Professionals and the Self Employed (IPSE) into the IR35 changes found that 35% of freelancers had abandoned self-employment altogether.
The Injustices Caused By The IR35 Changes
Not only have the 2017 and 2021 IR35 changes had a highly detrimental impact upon the economy, but they represent an appalling injustice. The main injustice 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 of the issues 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.
Call For A Repeal Of The IR35 Changes In the Budget
Given the problems caused by the 2017 and 2021 IR35 changes, the Conservative MP, Sir John Redwood, has called upon the Government to repeal the IR35 changes in the Budget. He argues that: "We should reverse the 2017 and 2021 changes. The self-employed are getting a very bad deal.... We need to take some of the worries off the shoulders of self-employed who are wanting to spend their time winning clients and doing a good job rather than having to fend off too many tax inquiries....We want to promote more self-employment – make it easier for people to get into self-employment. That is the quickest way to expand capacity."
Nevertheless, a repeal of the IR35 changes in the Budget is very unlikely. For one thing, the person responsible for extending IR35 to businesses with 50 or more employees in the private sector in the first place, was the person who is now Prime Minister - Rishi Sunak. He was the then Chancellor of the Exchequer who oversaw the changes that came into effect on the 6th April 2021.
Moreover, the Association of Independent Professionals and the Self-Employed (IPSE) have concluded that there is “next to no chance”of a repeal in the Budget.
