IR35 reforms repeal scrapped: Government labelled ‘spineless’ over u-turn

The UK government stands accused of being “spineless” over its decision to cancel the planned repeal of the IR35 reforms in both the private and public sector from April 2023.

As reported by Computer Weekly, new chancellor Jeremy Hunt confirmed in an emergency statement earlier today (17 October) that the planned repeal will no longer go ahead, less than a month after his predecessor, Kwasi Kwarteng, announced it.

Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), said the u-turn will be a “huge blow” to thousands of self-employed contractors and the businesses they work with.

“The reforms to IR35 have created a nightmare for businesses seeking to engage talent on a flexible basis, while simultaneously forcing individuals out of business altogether,” said Chamberlain.

“We know the government is well aware of the problems caused by this damaging legislation – the previous chancellor said so at the mini-budget and the prime minister made it clear during her leadership campaign. Despite this, it has today taken the spineless decision to row back on its promise to repeal the reforms.”

The IR35 reforms were first introduced to the public sector in April 2017 before being extended to medium-to-large private sector firms in April 2021, and saw contractors cede control for determining how they should be taxed to the end-user organisations that engaged them.

Previously, contractors were able to self-declare whether the work they did, and how it was performed, meant their engagements were in or out of scope of the IR35 rules, but according to HM Revenue & Customs (HMRC), this system was being abused by some to deliberately misclassify themselves as working outside IR35 to artificially minimise the amount of tax they pay.

This is because engagements that were classified as being inside IR35 meant the contractors concerned would be treated as employees for tax purposes and would be expected to make the same pay-as-you-earn (PAYE) and national insurance contributions (NICs) as permanent employees.

The roll-out of the changes to both public and private sectors brought about huge upheaval for IT contractors as some end-hirers sought to sidestep the additional administrative burden this shift in responsibility put on them by introducing contractor hiring bans and policies that stated they would only engage contractors working via umbrella companies.

Other organisations decided to issue blanket determinations, whereby all contractors were deemed to be working inside IR35 as a means of ensuring compliance and to reduce the risk of being saddled with a sizeable tax bill later down the line for incorrectly assessing their contractors tax status.

As documented by Computer Weekly, the reforms prompted some enterprises to outsource and offshore their IT requirements, which is a trend Chamberlain fears will accelerate in the wake of the repeal being cancelled.

“Businesses that were looking forward to an era of less complexity and less cost will have had those hopes dashed today,” he said. “Our fear is that this decision will lead to yet more work being offshored to other territories and more people being forced to work through unregulated umbrella companies.

“The supposedly pro-business Conservative government has sent out a clear message today – it does not support people who work for themselves.”

As referenced by Chamberlain, a review of how the IR35 legislation works was something Liz Truss said she would be committed to doing should she become prime minister. And with the repeal now cancelled, there are growing calls for her to follow through on her pre-election pledge.

On this point, Penny Simmons, legal director at law firm Pinsent Masons, said: “It would be good to see the Treasury take this opportunity to undertake a comprehensive review of the IR35 rules and commit to real reform. That should include dealing with one of the major issues with IR35 – the complex test for determining whether someone should be an employee or self-employed.

“The government should now consult with businesses, tax professionals and stakeholders across industry to develop a tax system that is fairer to businesses and off-payroll workers and isn’t vulnerable to tax avoidance.”

Matt Fryer, managing director of umbrella company operator Brookson Group, said with the repeal now off the table, the government’s focus should be on ensuring businesses have the education and support they need to implement the IR35 rules properly.

“More needs to be done by HMRC in terms of education and support for the entire flexible labour market,” he said. “In the meantime, hirers, recruiters and their supply chains must ensure they are compliant with the rules currently in place.

“The International Monetary Fund and markets have strongly indicated that the Treasury must rebalance the books through taxation, so HMRC will be proactively seeking to recoup tax liabilities in the years to come.”