It’s time to scrap IR35 and work for a fair, equitable and simple tax system

The House of Lord’s report into the proposed changes to IR35 comes at a critical time. The government is still intent on including the IR35 provisions in this Finance Bill, which would lock in these disastrous rules for April 2021. The Sub Finance Bill Committee, chaired by Lord Forsyth, has raised valid and deeply concerning questions about the wisdom of this move and the government should urgently pause and take stock.


The report rightly highlights the inherent flaws in both the existing IR35 rules and the proposals to change them. These problems have always been there but now there are two additional factors to consider:

  1. We now know for certain how hiring organisations will react to the reforms. In the months leading up to what was to be the implementation date (since delayed due to the Covid-19 crisis) several large organisations blanket-banned the use of contractors. So terrified were they of embroiling themselves in the notoriously complex IR35 rules, they decided to avoid the whole mess altogether and terminate all their contracts.

    This was never the stated aim of the policy. In fact, the government repeatedly used the line ‘the genuinely self-employed will not be affected by the legislation’. Evidently that statement has been proved to be false and thousands of genuinely self-employed businesses were forced to close as a direct result of the measure.
     
  2. The changes to the rules were designed well before this terrible virus – and the resulting measures to protect ourselves from it – took hold of our economy. We would echo Lord Forsyth’s comments that the delay to the IR35 measures was welcome and necessary in light of the present crisis. We would strongly urge the government to heed of his concern that business may well be in no better shape to shoulder the burden of operating these rules next April.

    The prudent choice would be to wait and see how the economy is faring before tossing the grenade of IR35 into the labour market. As businesses emerge from what the Bank of England are describing as the worst economic shock for centuries, it may well be that they will look to the flexible expertise of contractors to get their projects off the ground. The last thing businesses will need at that time is endless circular arguments over IR35 status and the fear that HMRC might disagree with their IR35 status determinations, landing them with a huge tax bill they almost certainly won’t be able to afford.

The delay buys us some time to look again at not just IR35 but the entire tax and employment status systems. What is needed is a fair, equitable and, if at all possible, simplified system of taxation which fits modern working practices. Describing someone as ‘employed for tax purposes only’ is clearly nonsense. Either you’re employed, or you’re not, and the tax system should reinforce that status, not confuse it further. That’s what IR35 does, and that’s why government should take this opportunity to move away from it.

 

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Andy Chamberlain

Director of Policy and External Affairs

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