IR35 is holding back the economy. It’s time for a change

IR35 is holding back the economy. It’s time for a change

By Andy Chamberlain , Director of Policy at IPSE - The Self-Employment Association

IPSE’s second Spotlight report – our annual look at IR35 – is now out. The findings are both shocking and depressingly predictable. IR35, or the off-payroll working rules, continue to have a major impact on both contractors and hirers. The full report can be found on IPSE’s website . I won’t list out all the statistics here but a few lowlights include:

  • One in ten contractors out-of-work due to IR35
  • 55% of contractors had rejected an offer of work in the past 12 months due to it being deemed ‘inside IR35’ by the client
  • 24% said they intend to seek contracts overseas this year to escape the rules

A burden on business

There is no question that IR35 is a huge hassle for business and is acting as a barrier to work opportunities and economic growth. Clients don’t understand the employment status rules any more than anyone else, but they know for certain that they don’t want to be dragged through the tax tribunals by HMRC so they err on the side of caution and insist that contractors go on the payroll.

Effectively this puts people who were in business, out of business. Where once they were independent and working for themselves, now they find themselves in quasi-employment within an umbrella company. Many contractors refuse to accept this so they don’t accept the gig, they spend longer ‘on the bench’, not earning and not paying any tax at all. The clients meanwhile have to work harder to fill the roles, often paying more for less experience and expertise.

Unlocking growth

If, for a moment, we imagine a world without IR35, it’s easy to see that things would be so much easier. Individuals would be free to work in the way they want, and clients would be free to hire them. Contractors de-risking clients, enabling them to innovate and grow, getting paid and paying tax. The problem of course would be that the taxman would feel that some of those engagements were really employments, disguised as business-to-business contracts so that the clients don’t have to pay Employers’ National Insurance.

The government say the rules ensure that those who work like employees, pay tax like employees and that the reforms have raised an additional £1.8bn in exchequer revenue. We can partially agree with this. The off-payroll rules have undoubtedly increased the tax take. More of the ‘disguised employed’ are now paying employment taxes, as they should do. The problem is so many genuine contractors are now also being – incorrectly - taxed as employees, or refusing to work altogether.

‘Detering legitimate economic activity’

It's not just IPSE saying this. Recently the Public Accounts Committee voiced it’s concern “that HMRC’s approach to tackling IR35 is deterring legitimate economic activity, and that a lack of confidence in how to apply the rules, together with HMRC’s tough approach when taxpayers make mistakes, is unnecessarily putting companies off using contractors.”

The solution to this problem must surely lie in scrapping IR35 and thinking a little harder about what we could put in its place that would enable the freedom and flexibility that individuals and hirers crave, while also ensuring that appropriate taxes are paid. One idea that IPSE has previously promoted is something called the Freelancer Limited Company (FLC) .

The Freelancer Limited Company

The FLC would be a normal company formed under the Companies Act but would choose to operate under particular restrictions in order to qualify for specific tax treatment. FLCs would be exempt from IR35, allowing their clients to hire them without fear of investigation from HMRC. In order to achieve FLC status, companies would have to pass entry tests and meet ongoing tests to ensure they are genuinely in business.

The beauty of the FLC concept is that it would be completely transparent and it can be taxed proportionately, while still remaining attractive to those in business. We developed the idea a few years ago with EY and the then director of the Office of Tax Simplification (OTS), John Whiting, was supportive. He set up some meetings with HMRC and initial discussions were positive, but they fizzled-out amid the turmoil of the Brexit referendum and resulting political chaos. We believe now would be a good time to revisit the proposal to see if it could be tweaked and applied to today’s IR35 landscape.

The Engagers’ Levy

Another idea is an ‘engager’s levy’. This would see hirers paying a levy directly to HMRC every time they make a payment to a self-employed (sole trader or limited company) service provider. This idea was first discussed in a paper commissioned by IPSE and written by the Think Tank Demos called Free Radicals .

The engagers’ levy would mirror employers National Insurance. As most are already aware, NI is really just tax by a different name. When a hirer employs an individual, they pay the NI to HMRC, on top of payments to the person. If they engage that individual on a self-employed basis, there is no employers’ NI charge, so the taxman doesn’t get his 13.8%. Employers’ NI is the main chunk of change that the exchequer misses out on when an engagement is ‘outside’ IR35. It could be argued that the only reason IR35 exists is to protect employers’ National Insurance.

So what if a similar charge were applied to freelance contracts? That is what the engagers’ levy would be designed to do. We would argue that it should be considerably less than the 13.8% applied to employments, and really very small (perhaps 2%) initially while the impact of the levy is assessed, but by introducing this kind of charge, the government could do away with IR35 and freelancers would be free to operate as they choose.

Once again we are not the only ones who think this idea could be worth exploring. Bill Dodwell, the last tax director of the OTS, wrote about it in his outgoing letter to the Treasury Committee when the OTS was disbanded in 2023:

“Future governments may wish to consider … whether the differential between taxing different types of work should be reduced. One possibility would be an “engagers’ levy”, payable by organisations which use freelancers.”

Time for change

Neither the FLC nor the engagers’ levy are simple fixes. Both would be complicated to implement and would need careful consideration. But these are the kind of ideas we should be discussing with much more urgency than we are at present.

The IR35 rules are despised by business. They are impenetrably complex and are a barrier to growth. The next government has an opportunity to try something genuinely radical that would encourage, not deter, legitimate economic activity and still protect the tax base. Rather than forcing people to work in a way that fits with the tax system, lets design a tax system that fits with the way people want to work.


Mark Welch

IT Contractor

7 个月

The main issue is neither the conservatives or the labour have any real appetite to resolve the issue which has been created by both parties labour with the original ir35 which were liveable but deeply flawed and the reforms introduced by the tory party have led to this mess,but both parties along with the hmrc would prefer most of us to be payed via payee far simpler for the hmrc in terms of admin costs , politicians seem to think the numbers in the terms of losted votes won't cost them an election, look for example the loan charge appg plenty of mps pointing how unjust the policy but no movement from government view in regard to meaningful and fair resolution. The political party in Westminster that indicated that it would scrap both the IR35 reforms and restore expenses for umbrella workers was the Scottish nationalist party , lib Dems promised a review of the reforms nothing else.

Rod Corderey

Freelance Oracle Database Troubleshooter, Designer, Data Architect, Technical Architect,Forms Designer/Developer – Remote

7 个月

In the above, it seems to me that a sole trader - like myself, working in IT in partnership with my wife - is not considered. The only road seems to be the limited company one which I'm reluctant to follow. I don't understand why there can't be a simple system like the 714 tax exemption certificate of the 1970s construction industry, which defined that the revenue accepted that you were properly self employed and were submitting accounts to the Revenue the question of responsibility for Tax and NI being yours.

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