Latest twist in the IR35 story another reminder of its fundamental flaws
- 29 Sep 2022
Update: The information in this article is out of date. For the latest on IR35, visit our IR35 hub.
Legislation is supposed to work a certain way: the policy gets outlined; government consults; legislation is drafted; there may be a further technical consultation; Parliament scrutinises it; the law is passed.
That process is designed to iron out any kinks so that by the time the law is implemented, it’s fairly robust and most people are broadly happy with it. It then remains on the statute book for several years, unchanged and everyone – even those that didn’t really like it to begin with - learns to live with it. It becomes embedded.
We can categorically say that IR35 has not followed that pattern.
Another twist in the history of IR35
Last week’s announcement by the new Chancellor, that the 2017 and 2021 reforms are to be repealed, is just the latest twist in the IR35 tale – it almost certainly won’t be the last. Ever since the policy was first suggested it has been hugely controversial. That controversy has prevented IR35 from ever settling down. It has never achieved ‘embedded’ status, instead it has been permanently ripe for review and reform and reviewed and reformed it most certainly has been.
The Inland Revenue’s 35th item in the press notice from Gordon Brown’s 1999 Budget sparked such outrage that a whole new trade association was formed intent on fighting against it. There aren’t many legislative items that can lay claim to that! That trade association was the Professional Contractors Group or PCG. It is now known as IPSE.
The campaign against IR35
IPSE, or PCG as it was then, set about making itself heard – launching a judicial review and more-or-less bringing Parliament to a standstill during one particularly effective mass lobbying event (or so I am reliably informed by some of our long-standing members – I cannot claim to have been there at the time).
PCG did enough to get the Conservative Party – then in opposition - firmly onside. I think I’m right in saying that William Hague, the Tory leader at the time, mentioned the good work of PCG at the dispatch box.
It took a few years but in 2010 the Conservatives came to power, albeit in coalition with the Liberal Democrats. They immediately announced IR35 would be reviewed by the newly established Office of Tax Simplification. That review didn’t, however, lead to the abolition of IR35 as had been suggested by the Conservatives while in opposition. Instead, the 'IR35 Forum' was created, which IPSE sits on it to this day.
The Forum, pushed on by IPSE, effectively brought forward its own review which briefly resulted in the introduction of the ill-fated Business Entity Tests. The BETs were a good idea but the execution of them was all wrong and they ultimately did nothing to help the vast majority of those burdened by IR35. After a few years they were scrapped and no-one was sorry to see them go. IR35, though, was still with us.
New government, new policy
By the time the Conservatives won an outright majority in 2015, the Party seemed to have completely abandoned its opposition to IR35 and in fact started to consider ways of making it worse. There followed a period of further review and consultation which resulted in the introduction of the public sector changes in 2017. Now public authorities had to make IR35 determinations on behalf of the contractors they work with, and tax had to be deducted at source, as it is for employees.
The change was a disaster, causing havoc for public sector projects. The government ignored the evidence and refused to acknowledge the problems that were happening right in front of them.
Just over a year later the government announced it’s plans to extend the reforms to the private sector, having promised it had no intention to do so just months earlier. IPSE lobbied hard and prevented the quick introduction of the private sector rules (which had been planned for 2019). This gave the House of Lords Finance Bill Committee time to conduct yet another review which was scathing about the proposals.
The government had other problems in 2019 which resulted in Prime Minister Boris Johnson dissolving Parliament and calling a General Election. IR35 became a major talking point during the election campaign, and one by one all the Parties promised that if they were to win the election they would – you guessed it – review IR35.
Another ill-fated review
The Conservatives won and swiftly ‘reviewed’ the private sector plans (N.B. not IR35 as a whole). This review was basically meaningless. I sat across from Jesse Norman, the then Financial Secretary, and explained exactly why the proposal would result in huge admin costs for business, forced umbrella ‘employment’ for those who didn’t want it and inaccurate IR35 determinations. Nothing that I or anyone else said at those meetings was going to make any difference, the reforms were coming in – the government was in intent on it.
The global pandemic brought about another delay but a small Tory backbench rebellion wasn’t enough to prevent the reforms hitting the private sector in 2021. It’s been a disastrous couple of years for those that want to work independently, and those that want to hire them and seems that we finally have a Chancellor that understands that. Just two years after the private sector reforms were introduced, they are set to be repealed (taking the public sector changes with them).
Putting an end to the tinkering
Don’t get me wrong – IPSE is delighted by this news. We opposed the reforms from day one and it is a very, very good thing they are set for the scrap heap. But when looked at in the context of the whole sorry history of IR35 overall, it becomes clear that the real problem here is IR35 itself.
It’s time now to stop tinkering about with this legislation. No more reviews, no more reforms, no more repeals of reforms. Let’s grasp the nettle or, as a former Tax Director of the OTS once said – let’s lance the boil of IR35 – once and for all.
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