Will Rishi Sunak’s arrival at Number 10 signal the end of IR35 repeal hope?

When Liz Truss came into power, just 49 days ago, the promise of an IR35 review gave hope that finally the Government were listening to industry concerns about IR35 Off-Payroll reform (OPR). However, contractors, businesses and recruiters saw hopes dashed when Jeremy Hunt U-turned on the repeal decision.

With the news yesterday that Rishi Sunak will now become Prime Minister, will the U-turn on the OPR repeal remain? Or will it all change yet again?

Was the initial repeal announcement an admittance of failed IR35 OPR reforms, or was it really intended as a measure to drive growth? I think both…

IR35 OPR is fundamentally damaging the UK labour market, which, in turn, is preventing growth. Many contractors have been forced to close their company as a result of the reforms, unquestionably damaging the UK’s economic outlook.

Repealing IR35 OPR came as a surprise but it was the right decision, and many businesses welcomed the move. Following the private sectors incarnation of OPR in 2021, lots of businesses stopped entertaining ‘outside IR35’ status at all and refused to engage with contractors, fearing the tax risk.

The National Audit Office indicated this was a direct result of reforms, stating that there had been a shift in the way hirers approach contracting post-reforms, including the increased use of umbrella companies, often forcing legitimate contractors unfairly to work though unregulated umbrella companies.

Andy Vessey ATT, Head of Tax here at Kingsbridge, says “SMEs are the backbone of the UK’s economy, and the IR35 OPR is an obstacle to economic growth. Self-employed contractors feel they have been unfairly treated under the current rules, and many end clients have avoided engaging with contractors since its inception.”

Considering the implementation of IR35 OPR, it’s clear that HMRC have failed the public sector in 2017 where these rules were first introduced. Departments had little time or guidance to prepare for changes, leading to tax bills for historic IR35 errors and non-compliance currently in excess of ￡260m.

HMRC’s guidance and information includes its own Check Employment Status for Tax (CEST) tool, which, in our opinion, is fundamentally flawed. Referring to the House of Lords’ Economic Affairs Committee Finance Bill Sub-Committee report in April 2020, the Lords questioned whether CEST was fit for purpose and stated the tool fell well short of what is required.

One in five (21%) CEST results gives no determination at all, and a general criticism is that it does not fully reflect case law, thus creating more uncertainty.

Whilst we have not seen much or any compliance activity within the private sector, it is coming. My fear is that many businesses relying on HMRC’s guidance and flawed CEST tool will unknowingly sleepwalk into a similar position that many Government departments find themselves in. The damage is yet to be seen but it's clear that HMRC haven’t gone far enough in providing certainty for businesses.

Is it really back to as we were?

The short answer is yes. OPR will remain unchanged; end clients will still be responsible for IR35 status. But does the conservative party chaos – and yet another change in PM - present an opportunity for IR35 OPR to be reconsidered?

In our view, it should be, yes. It was the correct decision to repeal the reforms, given its flaws. However,  following numerous government U-turns, Rishi Sunak is unlikely to give IR35 OPR any real consideration given that under his tenor as Chancellor, there was no indication that a repeal was even in conversation.

Andy Vessey comments “if, as expected, Sunak becomes PM, then I do not foresee any significant economic growth within the contracting industry due to [IR35 OPR] remaining in situ coupled with the substantial increase in Corporation Tax to 25% as from April 2023.“

Keep Going

The current IR35 reform rules are likely to stay for the foreseeable future, so if businesses want to stay competitive, they should be embracing contractors, rather than ignoring this pool of talent. It will be far more beneficial in the long run.

It’s clear that robust supply chain management for both IR35 and onboarding will remain critical to identify any services being provided by PSCs at the point they are onboarded.

Many organisations are engaging with status by fairly assessing IR35 with help from specialists, such as Kingsbridge, providing both status tools and IR35 insurance to mitigate risk.

IR35 reforms will be a key area of focus for HMRC as the government attempts to close the almighty hole in its pockets. Businesses should, therefore, anticipate heightened audit activity and invest in a robust auditable solution to manage compliance like the one that Kingsbridge can provide.

Written by Ryan Dawson, Victoria Palmer & Andy Vessey ATT