The Tories’ Decision on IR35 Reform Will Impact More People Than You Think

Unfortunately, despite the Lib Dem call for the IR35 reform to be scrapped, the Government has announced it will go ahead with the reform from April 2021.

Before I get onto the effects it will have on the Self-Employed, let us go over a little background. In the 2019 General Election, the Liberal Democrats were the first to address the IR35 reform, saying they would review it. Ed Davey said it would “undermine the flexibility of self-employed people”. They were followed by Labour, who pledged to halt the IR35 reforms, then went back on it, then changed their minds again. This is only one part of Labour’s confusing relationship with IR35 as it was the idea of Gordon Brown in the first place! The Conservatives, “the party of business”, worried contractors with their silence over the issue until Sajid Javid announced that if the Tories retained their Government, they would review the IR35 reform, it was more a last-minute vote grab than a policy.

Anyway, back to now, what effects will this reform have on self-employed? The aspect of the IR35 reforms with the biggest impact has been the responsibility of employment status being on the client/employer/agent rather than what was previously the responsibility of the contractor/employee to evidence.

To avoid the risk of the intrusion of an HMRC audit or reputational damage of a fine, companies that rely on a large contingent workforce have understandably declared that they will no longer employ contractors working solely through a limited company. Following the correct procedure and assessing every contractor in their contingent workforce would be too costly. So, therefore, a blanket rule, without assessment, was enforced throughout the majority of the financial sector.  This was applied in expectation of IR35 reform implementation of the fiscal year 2020-2021. Which, of course, didn’t happen, but the damage was already done since these large organisations had already spent time on their onboarding processes and have no intention of reversing them.

Many contractors have had to close their companies as a direct result even though if assessed, they would be eligible to maintain their limited company status. Many were midway through a contract and had to decide to damage their professional reputation by leaving, or stay on a project with clients and work through an Umbrella company. Thereby being in the position of:

  • Being treated as an employee with no employment rights and no National Insurance contribution from Client/Employer.
  • Potentially opening themselves to a retrospective investigation from HMRC.
  • As Ed Davey said, having their flexibility taken away from them. Flexibility to be enterprising and provide their trade to multiple clients across many industries.

The new IR35 reform will directly affect 15% of the UK’s workforce across all industries that rely on a contingent workforce. What is perhaps more concerning is the indirect effects on permanent employees when some businesses realise that they can hire contractors, expect them to behave like employees but provide no employment rights and pay them no national insurance.

The Tories (“the party of business” but perhaps more “the party of big business”) are to blame for this. More work needs to be carried out by opposition parties, and the public need to be made aware of the impact these reforms will have on everyone.

* Ryan Hollinsworth is a member of the Scottish Liberal Democrats

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16 Comments

  • James Belchamber 15th Jul '20 - 10:37am

    As a contractor: Good. The idea that I pay less tax than a full-time employee I work alongside is sickening to me. Reform is well overdue, and it’s clear to me that much of the “industry” is clearly just individuals and companies mutually dodging their responsibilities for profit.

    IR35 targets disguised employees, not all contractors, and although I think we could do better we should not be on the side of tax-dodging just because they have a powerful lobby.

  • Ryan Hollinsworth 15th Jul '20 - 10:42am

    @James Belchamber What you are failing to miss is the way clients have reacted and that genuine businesses have been affected

  • Ryan Hollinsworth 15th Jul '20 - 10:52am

    And additionally @James Bellchamber if you feel so strongly about permanent employees then maybe you should back a more thought out reform

  • So James, its okay to be on the side of the “party of business” and its well heeled supporters who want legalised zero-rights employment?
    IR35 (2021) doesn’t put to bed the “idea that I pay less tax than a full-time employee I work alongside”, it ensures you will pay more tax, with none of the benefits; remember within IR35 (2021) and also with umbrella companies, the full invoice amount is regarded as income subject to PAYE+NI, no allowance for on-costs or business continguency.

    I assume James Belchamber Limited is an umbrella company, as otherwise I don’t see how you can be so welcoming of the changes, given their reported effects to date on IT related engagements. For example, organisations such as Barclays making blanket decisions putting all contractors within IR35 without assessment of specific engagements against IR35 (2021).

    With respect to the article:
    Many contractors have had to close their companies as a direct result even though if assessed, they would be eligible to maintain their limited company status.
    This is confusing two different things. IR35 has no impact on the director’s of a company, only the employee with respect to a single engagement (which may be running concurrently with other engagements). Thus having an engagement deemed as being within IR35 doesn’t prevent an individual from continuing being a director of and operating their own company.
    Some contractors have been closing their company’s because they don’t see a reason to maintain the expense of operating both their own standalone company and paying an agency to operate an umbrella company on their behalf.

  • James Belchamber 15th Jul '20 - 2:16pm

    @Roland why is it shocking to you that someone would support something that’s more fair, even if it might negatively impact them personally?

  • Peter Watson 15th Jul '20 - 3:43pm

    “when some businesses realise that they can hire contractors, expect them to behave like employees but provide no employment rights and pay them no national insurance”
    What do you mean “when”?! 😉
    Many, if not most, if not nearly all, contractors I have worked with in large companies over the years (including myself a few times) are indistinguishable from the employees they sit alongside.
    Setting up a limited company was always recommended as a way to operate because even after paying accountancy fees, there was more money to take home because less would go to the taxman.
    I agree with James Belchamber: “IR35 targets disguised employees, not all contractors”. IR35 is not new: it came in twenty years ago, the regulations being rolled out now in the private sector were implemented in the public sector three years ago, and this was announced by the Chancellor in October 2018, so where was the Lib Dem outrage then? In principle nothing has changed but now the company engaging the contractor is responsible for deciding whether or not an individual contractor works more like an employee than a truly external consultant or service provider, and is liable for any unpaid tax if the taxman believes it is disguised employment.
    If the contractor is really working like an employee but without the same employment rights then it seems fairer that the “employee” should receive more money in exchange for sacrificing these rights. But shouldn’t that be paid explicitly by the “employer” (who benefits from a flexible workforce) rather than it being an accidental subsidy through the tax system? After all, contractors send their children to the same schools, attend the same hospitals, are protected by the same armed services, etc. as employees. If the economy benefits from this employment flexibility then perhaps it could be a deliberate part of the tax system and cut out the cost of accountants. But I suspect that opening the can of worms of explicitly allowing/forcing (depending on one’s point of view!) employees to bargain away their employment rights is much more problematic politically than simply turning a blind eye to a bit of tax avoidance.

  • Peter Watson 15th Jul '20 - 3:54pm

    @Ryan Hollinsworth “@James Belchamber What you are failing to miss is the way clients have reacted and that genuine businesses have been affected”
    And why have clients reacted like this? Perhaps they know that so many engagements would be considered “disguised employment” that it is not worth the time and cost to identify the few exceptional “genuine businesses”. After all, those same clients will continue to engage third-party service providers, external consultants, companies that bid for particular projects and sub-contracts, etc., i.e. entities that look more like “genuine businesses” than a 9-to-5er in a cubicle who could be an employee, self-employed, a PAYE contractor, a limited company contractor, an umbrella company contractor, etc. without anybody being able to see a difference at the end of the day!

  • Being a contractor and being an employee are totally different – and if folk dont understand that after Covid they will never understand it.

  • Peter Watson 16th Jul '20 - 7:57pm

    @Alistair “Being a contractor and being an employee are totally different – and if folk dont understand that after Covid they will never understand it.”
    I’m not entirely sure what point you are making here. If it is about the loss of income because of covid then that is a much wider issue than contractor or employee status: plenty of employees on zero-hour contracts have lost work and lost income.

  • Zero hours contracts are exploitative – full stop – regardless of the virus or tax. They wouldnt exist if there was enough quality work around.

  • Peter Watson 17th Jul '20 - 8:24am

    @Alistair “Zero hours contracts are exploitative”
    Totally agree. I’ve never really understood the justification (sometimes even on these pages, but I don’t recall seeing anything like that in recent years) that they’re great for giving employees flexibility. For me, it’s “flexibility” if I choose when to work, not my employer.

  • Peter Martin 17th Jul '20 - 9:07am

    In Australia there is what is known as an 80/20 rule for contractors which effectively means your income can’t largely come from a single client. If it does, you end up with the worst of both worlds. You have to pay income tax as if you were an employee but without sick leave and paid holidays plus you have the hassle of running a limited company.

    It’s something that could be copied here.

    https://contractortaxation.com/australia/taxation/what-is-the-80-20-rule-for-contractors/

  • Peter Watson 18th Jul '20 - 9:58am

    @Peter Martin “In Australia there is what is known as an 80/20 rule …”
    I’m sure there are potential problems but I guess a rule like that at least makes it clear.
    In this country, the golden rule seems to have been whether or not the contractor could provide a substitute so lots of contracts were modified to include a suitable cause and nobody cared whether or not it would or could be implemented in practice. Now, the company engaging the contractor has to take an interest in that!

  • Peter Watson 18th Jul '20 - 10:26am

    “What is perhaps more concerning is the indirect effects on permanent employees when some businesses realise that they can hire contractors, expect them to behave like employees but provide no employment rights and pay them no national insurance.”
    In many ways this is the crux of the issue, but it is nothing new. For many years businesses have hired contractors, expected them to behave like employees, and provided no employment rights. The reason many contractors have been willing to go along with this is because operating as a limited company allows them to maximise their income by paying much less tax (like Jimmy Carr or Starbucks on a smaller scale! 😉 ).
    It seems to me that the company engaging the contractor should be paying a premium for the privilege of an “employee” willing to forego their employment rights, rather than it being subsidised by taxpayers.
    IR35 seemed a step in this direction, but instead of contractors’ rates increasing to compensate for the taxation, the tax was largely avoided. The recent changes make avoidance harder as the “employers” now have a lot to lose and a competitor or disgruntled employee (or even an ex-contractor who would no longer be worried about an IR35 tax bill) could “grass” to HMRC.
    I must admit I’m a little sceptical about Lib Dem motives here. It looks like a pitch for the vote of affluent liberal-leaning IT contractors, but in my experience contractors (especially in other disciplines) are much more of the conservative-leaning, Telegraph/Mail-reading variety! (a tongue-in-cheek emoji would be nice here)

  • Contractors impacted by IR35 clearly do not have the same benefits as employees, therefor the tax like for like argument is a nonsense.
    If this was just about tax take, there is a much easier option just to add a hirers tax to the rate of the contractor. IR35 is just a spiteful political measure to attack and label the self employed as tax-dodgers and also start a new wild west of umbrella companies.

    Where is the legislation to improve employment rights for inside IR35ers? where is the legislation to regulate umbrella companies?

    No thanks, if someone offered me an inside IR35 contract I would run a mile.

  • Zero hours contracts are quite common. If i take a taxi, i hire it only for the 10 or 20 minutes that i use it. A gardener might cut your lawn for £50. I dont see a particular problem with it, if both sides agree to the terms. Clearly the gardener or taxi driver take more risk than a civil servant. They should pay less tax because they are in a risky position.

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