Hope for contractors? The IR35 battle rages on

A blunt pronouncement from a former secretary to the Treasury has rekindled the flames over the controversial changes to IR35 rules. 

Speaking at a Treasury committee hearing on 21 October 2020, chairman Mel Stride ignited the dormant debate with the declaration: “Leading us all unfortunately to the dreaded IR35, I think we are all agreed this is best abolished as soon as possible.”  

Few tax policies have been as divisive as the soon-to-be-implemented changes to IR35, the HMRC rules aimed at assessing whether a contractor is a genuine contractor rather than a “disguised’ employee.

Despite outcries from the army of self-employed contractors, the government had been determined to implement changes to IR35 in April this year. At least it was – until the small matter of Covid-19.

Steve Barclay, the chief secretary to the Treasury postponed the changes until April 2021, but stressed the amendments were still going to happen, stating: “This is a deferral, not a cancellation and the government remains committed to reintroducing this policy to ensure people working like employees but through their own limited company pay the same tax as those employed directly.”

Mel Stride clearly has other ideas.

Why are the changes to IR35 so controversial?

Since the introduction of IR35 in 2000, most contractors in the private sector have self-declared whether or not they should be taxed in the same way as permanent employees.

It is a decision which has a big impact on the earnings of a contractor. By setting up a limited company, contractors have been able to pay themselves tax-saving dividends and their ’employer’ has been able to save on employer’s national insurance contributions.

One of the most disputed changes to IR35 switches the responsibility to medium-to-large private sector firms to determine how the contractors they engage with should be taxed.

Why has this caused such a controversy? Contractors fear that the companies will avoid any risk by defining them as being within IR35 – and as such they will pay more tax, but without basic employee rights such as sick and holiday pay.

And that assumes that medium or large firms will use contractors at all. Many companies have banned them outright. Computer Weekly reported earlier this year that, “In organisations where a large number of contractors are engaged, several high-profile organisations have opted to side-step the need to individually assess the tax status of each contractor they use by opting to phase out their use of personal service companies (PSCs) altogether. Companies in this group include IBM, Lloyds Bank, HSBC, Barclays Bank and GlaxoSmithKline.”

There has undoubtedly been a lack of fairness when two people were doing the same job, yet one paid considerably less in taxation, but many fear that IR35 modifications are akin to using a sledgehammer to crack a nut.

A burden on business?

In April, a 67-page report from the House of Lords economic affairs finance bill sub-committee, said the extension of IR35 put too great a burden on businesses and was unfair on contractors.

Lord Forsyth of Drumlean, chair of the committee, said: “Our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences.”

“The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the government. It must devote time to analysing all of this. A wholesale reform of IR35 is required.”

The implementation has been delayed until next year, but it is safe to assume that the economy will remain in a vulnerable position into 2021. The question is whether the government will have the appetite to make an unpopular taxation change when businesses are struggling to remain viable.

Alex Mann is Associate Director, Indirect Tax & Tax Technology at Harvey John

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