A new survey conducted by Qdos of 900 Contractors has found that the majority would like to see the 2017 and 2021 IR35 changes scrapped in the Spring Budget.
IR35: 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 (which means that they end up paying up to 30% more in tax).
Disastrous Impact
Nevertheless, the changes to the off-payroll working rules have had a completely disastrous impact on the economy. To begin with, they completely undermined the UK’s flexible economy. Previously, 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 new rules, thereby making projects more expensive and risky.
Consequently, a 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. Moreover, a separate report found that 35% of freelancers had abandoned self-employment altogether.
CEST Tool
Furthermore, 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.
The Injustices Caused By IR35
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.
An added problem created by the changes to the off-payroll working rules is that of double taxation in circumstances where there has been an initial incorrect status determination. Following a review, only recently, in the 2023 Autumn Statement, was it announced that a 'set-off mechanism' would be introduced to address this issue, but that will not come into force until the 6th April 2024. The 'set off mechanism' is currently the subject of a consultation.
New Survey
In a new survey of 900 contractors, Qdos found that:-
- 67.6% of contractors want to see the 2017 and 2021 IR35 changes scrapped
- 49% of contractors cited the IR35 changes as the primary reason for the decline in their business's performance during 2023
- 42.8% of contractors stated that they believed that the sheer complexity of the IR35 rules had resulted in them being unfairly classified as inside IR35, regardless of their actual employment status. That is, they felt that they have been subjected to a blanket determination
Commenting upon the findings, the CEO of Qdos, Seb Maley, stated: "Every year, the complex and confusing IR35 legislation stands out as the one freelancers and contractors want addressing most by Westminster. But time and time again, the powers that be choose to bury their heads in the sand. With the Spring Budget rapidly approaching, if repealing the legislation is out of the question, at the very least the government must resolve the major issues relating to IR35 and the off-payroll working rules."
Maley added: "From completely overhauling HMRC’s flawed IR35 tool, CEST, to helping ensure businesses carry out well-informed and compliant IR35 decisions, there’s a lot of work to be done on the IR35 front this year."
