What the IR35 U-turn means for the self-employed

By Andy Chamberlain, Director of Policy at IPSE

Following a brutal few weeks for the government and its policies announced as part of the mini-budget, new chancellor Jeremy Hunt ripped up his predecessor’s plans for growth and with it, rowed back on the government’s commitment to repeal the off-payroll reforms.

Despite the government recognising, just five weeks ago, that the IR35 reforms have “added unnecessary complexity and cost to many businesses,” contractors now face the prospect of being forced to operate through unregulated umbrella companies whilst further work is offshored.

Read our response: IPSE slams “spineless” government over IR35 U-turn:

Why the government was wrong to U-turn on IR35 and what this means for the self-employed

The announcement will be a huge blow for thousands of self-employed contractors and the businesses they work with. The reforms to IR35 in both the public and private sector have created a nightmare for businesses seeking to engage talent on a flexible basis, while simultaneously forcing individuals out of business altogether.

We know that 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 made the spineless and anti-business decision to row back on its promise to repeal the reforms.

In practice, the decision to row back on the IR35 reversal will mean that contractors will still have to contend with the current off-payroll rules that were introduced as part of the 2017 and 2021 reforms in the public and private sector.

Since the implementation of the reforms in 2021, we know that risk-averse clients have implemented blanket assessments of all engagements as ‘inside IR35’ or introduced a blanket ban on contractors operating through a limited company.

Rather than equipping businesses with flexible expertise and driving growth in a post-pandemic economy, IPSE research and committee hearings from the Public Accounts Committee and House of Lords Finance Bill Committee have demonstrated that the reforms have ultimately stifled the entire supply chain.

In the current system, clients are making determinations without understanding how the individual they’re engaging with operates. How can a client possibly determine whether an individual is on ‘business on their own account’, for example? This is a key test that has been cited in previous rulings on off-payroll engagements and one that clearly only the individual aware of their own business structure could determine.

These risk-averse actions from clients have ultimately diminished the number of contracting roles available to the genuine self-employed operating through a limited company.

The actual action of implementing blanket assessments is also, in itself, a form of non-compliance with the rules, though we have to yet see any attempt by HMRC to tackle this.

For more information, our latest blog looks at the actions of risk-averse clients and outlines five other key reasons for why government was fundamentally wrong to U-turn on IR35:

Whilst we are now aware of clients relaxing their initial blanket approach to contractors, it is important to remember that the soft-landing period for IR35 ended in April 2022 when HMRC promised not to impose penalties for any infringement of the legislation.

We also know that contractors, as a result of the reforms, suddenly found themselves forced to operate through quasi-employment models within the supply chain. Treated like an employee for tax purposes but unable to access many of the employment benefits that employee counterparts enjoy.

The unregulated umbrella company market has grown exponentially since the imposition of the reforms as has the practice of passing the liability for both employer’s and employee’s National Insurance contributions to those operating through an umbrella company.

If HMRC’s intentions with the reforms were to ensnare contractors with double taxation of National Insurance, to remove their independence and freedom to choose how they operate and ultimately stifle wider economic growth, then the reforms have worked just as planned.

For advice and support on IR35, IPSE members can visit our IR35 hub, access our contract review service, or contact our specialist tax and legal helplines.?