If prime minister Liz Truss is serious about another bash at reforming off-payroll and IR35 rules, there will be a long row to hoe, specialists in the contractor and freelance working space argue.
IR35 was previously reformed in April 2021, but the rules remain confusing for many UK-based IT contractors, freelancers and sole traders as well as the firms that hire them. A House of Commons Public Accounts Committee report published in May, for instance, found that public bodies alone owed around £236 million to HMRC for the 2020-21 tax year due to “incorrect administration” of the latest rules.
Truss, who has been crowned the fourth Conservative prime minister in seven years, has pledged a review into the IR35 laws, which have been a bane for many IT contractors.
“The changes that have been made to IR35 are all about trying to treat the self-employed the same as big business," she told the Sun in August. “But the fact is, if you’re self-employed, you don’t get the same benefits as being in a big company. You don’t get paid holidays, you didn’t get those benefits. So the tax system should reflect that more.”
How to reform IR35
Truss' recent remarks may sadly mean little unless her team tackles the complexities of the legislation and its widely reported issues head-on. For instance, what does “mutuality of obligation” really means, asks Rebecca Seeley Harris, Re:legal Consulting taxation lawyer employment status specialist.
“People don't understand what IR35 is ... in relation to employment status,” she says, noting that different pieces of legislation can be involved. “And it has been incredibly difficult for businesses to deal with when you have agencies working with the self-employed. We need clear definitions.”
Ambiguity in HMRC's check employment status for tax (CEST) tool – which can often leave users remaining uncertain of their actual legal status – should also be addressed.
Assorted complications arise from the backdrop of around 100 years of precedent case law – points with which Seb Maley, CEO at consultancy Qdos Contractor, also agrees.
“Current rules should be scrapped in their entirety,” Maley insists. “One key issue is it's based on decades of outdated case law.”
Greater scrutiny, and explication, of links between employment rights and privileges, and more equitable taxation should help point the way towards a fairer system that also ensures organisations and workers fully understand their rights and responsibilities, he suggests.
Further implementing the Taylor recommendations
Maley points out that the – so far largely ignored – 2017 Taylor Review cited that clarification and simplification of employment status and legislation were needed if the system is to be properly reformed for managing independent workers and “newer ways of working”.
James Poyser, CEO at accountancy InniAccounts and founder of offpayroll.co.uk, agrees – although he maintains that binning IR35 isn't needed. What needs fixing, he says, is the tendency for firms to default to PAYE to reduce risk, including by building a less ambiguous, more helpful CEST – one whose results HMRC itself would stand behind.
This would give certainty to the self-employed, as well as the companies that need flexible workers to drive growth and agility. Up to 1.2 million UK workers could benefit, says Poyser, because an effective blanket ban on contractors isn't good for business.
“When economies bounce back, the self-employed can be key to growth and recovery. Encourage HMRC to get together with a group of people, sit around a table, and take this on,” he says, noting that stakeholder expertise is available, including from the House of Lords if not always from the Commons.
Andy Chamberlain, policy director at the association for Independent Professionals and the Self-Employed (IPSE), adds Truss' focus on IR35 could be because the government is “obviously worried about corrosion of the tax base”.
What if more people choose off-payroll work and can pay less tax as a consequence? Changes to the tax system could help, he says.
“Then we don't have to worry about policing this boundary because we've come to a compromise basically – one key issue is the National Insurance (NI) the employer pays,” he offers.
NI could go under the microscope
Part of the solution might be around adjusting NI payment obligations so similar rates of tax ultimately end up in HMRC coffers regardless of employment status per worker. However, devising the right detail for a fairer regime may yet require quite a lot of “careful thought”, admits Chamberlain.
Kate Cottrell, managing director at IR35 and off-payroll investigation specialists Bauer & Cottrell, maintains that a full review is needed, instead of simply tinkering around at the edges, which she thinks is more likely.
“If you start out with a complete mess and on the back of it identify millions in underpaid tax and NI contributions, as in the public sector, any change is fraught with difficulty,” she says. “There are so many things wrong with the off-payroll rules for both public and private sectors.”
That said, provided all parties understand the rules and implement correct contractual terms, accurately reflecting day-to-day working practices, it remains possible to comply with confidence and without resorting to blanket bans or determinations that all contractors fall inside IR35, Cottrell says.
“Contractors engaged by medium and large businesses need to ensure they have Status Determination Statements and that they have had input into the status process. Companies and organisations that use them need to stand back and evaluate what it is they want – a specific project carried out by a professional contractor, or a 'disguised employee'?” she points out. “Don't wait for a review from Liz Truss.”
