Exclusion of Ltd Cos from Covid support is disappointing – but should settle IR35 argument

Millions of self-employed people woke up this morning after a slightly more restful night’s sleep – but not limited company contractors. If you choose, or are required by the industry you work in, to work via a limited company, you are excluded from the government’s ‘Self-employment Income Support Scheme’. While sole traders can look forward to a potentially substantial grant in around two months’ time, Ltd Co directors will get no such benefit.

Instead, the options available to you look thin at the moment – the Coronavirus Business Interruption Loans, the ability to defer or delay some tax payments, possible recourse to Universal Credit, and the ability to effectively ‘furlough’ yourself in order to access 80% of your PAYE earnings through the COVID Job Retention Scheme (we’ve had it on very, very good authority that you can do this, though there is some doubt circulating, and we are seeking clarification).

The message from the government is clear – if you are a contractor, you’re on your own. And that is exactly why the utter nonsense that is IR35 should be cast aside forever.

IR35 and the status of contractors

At this time of economic crisis, contractors have been right at the coal face of the shutdown. With no employment rights, and very often no termination period in their contracts, clients have been able to immediately cancel those contracts. Overnight, income for those contractors and their families has stopped, and the government has shown no sign of coming to the rescue. IPSE has heard hundreds of such stories in recent weeks across all sectors, from the creative industries to business services.

It has ever been thus for contractors. They have always been at the mercy of the market, and what the client or clients they work with decide. In so doing, contractors offer a vital flexible resource to their clients, and the UK economy. They enable clients to handle both peaks and troughs in demand – and right now the trough is pretty deep. In return, contractors should be able to charge a higher income than less flexible workers (enabling them to build up a savings pot for the down times) and, yes, marginally more beneficial tax treatment too.

That’s why IR35 has always been such a kick in the teeth. IR35 is not just a terrible piece of tax legislation, it is a club used to beat genuinely self-employed contractors over the head and to label them as ‘tax dodgers’. In fact, contractors are the powerhouses of our economy, driving innovation and providing expertise on a flexible basis in our most dynamic industries, yet the taxman views them with suspicion. IR35 was created to dismantle any tax advantage of working independently and so restricts the inherent vibrancy that contractors offer.

This April, IR35 was due to change – but not for the better. Clients and agencies would now decide the IR35 fate of the contractor and be held liable by HMRC for any ‘wrong’ decision. The result of this, as IPSE warned the government in no uncertain terms, was that clients felt forced to turn their backs on the flexible, vibrant expertise highlighted above. The banks went first, blanket banning all contractors. Other large hirers started to follow suit. As a result, thousands of perfectly compliant contractor businesses were forced to close. And the real kicker is, for most of them IR35 didn’t even apply – but, for the clients, that was irrelevant. The very fact that engaging a contractor meant they had to embroil themselves in the hopelessly murky world of IR35 was enough to make them turn their backs on the contractors that had served them so well, for so many years.

The Coronavirus crisis has, thankfully, offered a stay of execution on IR35 after much pressure from IPSE and others. Though it has come too late for some people, the delay to the IR35 change to 2021 has saved others – for now. The government still intends to bring in the changes, even in full knowledge of the fact it will wipe out thousands of legitimate businesses (on top of those it has already claimed).

The government’s package for the self-employed – but not Ltd Co’s

In its economic response to the crisis, the government initially pulled together unprecedented packages of support for businesses large and small, and employees.

IPSE, working closely with a coalition of other groups and politicians, has been leading a national campaign to get a package of financial support in place for the self-employed to make sure they were not being left behind. We set out our proposal here and made clear that any scheme should cover the whole self-employed population – including Limited Company contractors.

IPSE engaged openly and firmly with the Chancellor and the Treasury on the government’s response. However, the Treasury made it very clear from the outset that there would be firm parameters to any such financial support package.

First, while we argued strongly against this, it was clear that the government was not minded to consider ‘replacing’ dividend income in the same way as it has ‘replaced’ earned income. It was also clear that there would be a salary cap – this is one area where there was definitely movement over the past week as the eventual figure of £50,000 was substantially higher than other levels that were being mooted in the press. Of course, any such cap would have excluded many Ltd Co’s, including IPSE members – so there would have been little benefit even if contractors had been included in the overall package.  Lastly, and most importantly, the Chancellor’s statement on Thursday clearly stated that this package of support for sole traders will likely be contingent upon pushing up their National Insurances contributions.

IPSE made no promises about supporting a tax hike for sole traders. In fact, we took the opportunity to say the whole tax system for the self-employed needs to be reviewed, including IR35. But what was clear from the Chancellor’s stance, is that had limited company contractors been included in the package, we would have had little arguments left on IR35. The same ‘quid quo pro’ would have applied.

At IPSE we are pleased that for a lot of sole traders, particularly those on lower-incomes, much-needed help is going to be available. It is far from perfect – the wait until June will cause problems for many, the £50,000 cap creates a sharp cliff-edge, and there is no provision in the scheme for freelancers trading for less than a year. But it is much better than nothing at all.

We are certainly disappointed that many of our members and other contractors who operate via a Limited Company will miss out on the level of support available to other self-employed workers. We are frustrated with the lack of wider support for those who choose, or are sometimes simply required, to work in this way beyond loans and tax deferrals. And I know that many will face a challenging few months with their income regardless of whether they are incorporated or not. IPSE will endeavour to push the government for more support and give you practical advice and guidance where we can.

But there is, however, one silver lining. The exclusion of contractors from the scheme highlights that we are right in our cause against IR35. How can the government justify treating contractors as ‘employees for tax purposes’ when they’re carved out of support at this critical time? In the same way that the government told us that contractors couldn’t have it both ways, then neither can HMT. If ever there was a demonstration of the independence, self-resilience and downright ‘not-an-employee-ness’ of contractors, this is it.

IPSE will spend the next year with IR35 as a top priority. We want the delay to become a permanent abandonment of this dreadful policy. I know that times are hard right now, but I honestly believe that had contractors been included in the support package, our arguments over IR35 would be dead in the water. As it is, those arguments have been strengthened.

Meet the author

Andy Chamberlain

Director of Policy and External Affairs