IR35 – Scrapping reforms places burden back on contractors

“While reversing the 2017 and 2021 Off-Payroll Working rules will significantly reduce compliance burdens for big business it does not solve the problem of IR35. Instead it places the burden of compliance back on small independent contractors and freelancers.

“This is likely to lead to either widespread non-compliance, as happened under the old IR35, and as evidenced by the Government’s figures which suggest up to £2 billion will be lost each year, or to costly compliance activities for HMRC and a lot of pain for contractors having to defend their status assessments or face significant penalties from misunderstanding complex rules.

“Notwithstanding today’s announcement, the reality is that a more strategic review is required of the taxation of labour so that the differences between being taxed as an employee, as self-employed and contracting via a company are minimised or at least made clearer. The fact is employment status is a complex area, as illustrated by cases such as those involving Adrian Chiles, Kaye Adams and Lorraine Kelly as well as the Premier League Referees case (PGMOL) which is heading to the Supreme Court next year. Clearer statutory definitions would help workers and companies alike understand the distinction between employment statuses.

“Consultation is needed not only on the future of IR35, but also on how the employment status of a worker is established for tax purposes and what the differences should be in the taxes paid of the different status. Without a thorough review of this area we risk a return to the ‘bad old days’ when non-compliance was rife.

“And where does this repeal leave the current cases that HMRC have under review? For example, it’s been reported that HMRC was asking several government departments for a total of £263 million for their failures in applying the rules in 2020–21. Engagers will still need to ensure that they remain compliant with the current rules until April 2023 and, potentially, they’ll face scrutiny from HMRC over their decisions in this respect for years to come.”