Why IR35 is so damaging for the UK’s smallest businesses
IR35 is a tax law that allows HMRC to treat fees paid to a limited company as if they were an employee salary. It was created to stop ‘disguised employment’ – where employers save by paying their employees as if they were limited companies. This allows them to avoid all kinds of costs, from Employers’ National Insurance Contributions to sick pay and holiday pay.
What are the issues?
1.False accusations against freelancers
The main problem with IR35 is that it unfairly affects the smallest companies: freelancers. Numerous freelancers who legitimately use a limited company model to supply services have been falsely accused of ‘disguised employment’.
Worse, IR35 investigations can be long, intrusive and extremely costly for freelancers. They can even cause reputational damage, and many freelancers expend large amounts of time and money protecting themselves from the risk of IR35 investigation.
Since its foundation, IPSE has been campaigning against IR35 and its damaging effects on UK freelancers. Unfortunately, despite our hard work, IR35 remains on the statute book. That means everyone who provides services through their own limited company has to make sure they’re compliant with IR35 – or as compliant as it’s possible to be with such flawed and unclear legislation.
2.IR35 in the public sector
Since April 2017, responsibility for determining whether a contractor falls under IR35 has been moved away from the contractor themselves to the public sector body they are working for.
If the public sector client decides IR35 should apply – and most have – then the contractor’s payments are taxed at source, as if they were an employee. It’s meant many contractors have moved out of the public sector, stalling numerous projects across Government.
It has been nothing short of a disaster and we are doing everything possible to stop the Government extending the changes to the private sector.
3. IR35 in the private sector
In May 2018, the government launched a consultation on extending these catastrophic public-sector reforms to the private sector. Despite providing very little evidence to support its claims, the consultation document asserted that there is widespread non-compliance with IR35, thus justifying the intention to extend the changes to the private sector.
The consultation also included independent research, which investigated the effects of the IR35 reform in the public sector. The research contradicted HMRC’s assertions and instead served only to raise serious concerns about the wholly disruptive impact on the public sector.
IPSE campaigned forcefully against the proposal. Our consultation response can be seen here. Unfortunately the government decided to push ahead with the policy, despite its obvious flaws. We did, however, manage to convince the HM Treasury to delay the roll out in order to address some unresolved problems.
In March 2019, the Government launched a further consultation to consider those problems. It intends to apply the change to IR35 in the private sector from April 2020. IPSE will use this consultation period to highlight the devasting problems this anti-business measure will cause.
- Fighting IR35
- What's wrong with IR35?
- IR35 Defence
- IR35 news
- A Guide to IR35