Don’t celebrate the demise of the IR35 reform just yet

Tax policies are generally like marmite: you either love them or you hate them.

It would appear, however, that the changes to the IR35 tax rules, introduced first to the public sector in 2017 before being rolled out in the private sector in 2021, were the exception to this rule. Why? Because unlike marmite, people weren’t divided – absolutely everyone hated them.

That’s not strictly true, of course: HMRC was a big fan, collecting £1.2bn annually in tax revenues because of the changes. Which is all well and good, and I’m all for people paying the right and fair amount of tax.

But talk to any business owner, contractor, or recruiter like me, and it quickly becomes apparent that the reform, which makes employers responsible for their contractors paying the right amount of tax, is having a negative impact on UK business.

The ‘off-payroll working rules’

The ‘off-payroll working rules’, introduced as part of the IR35 reform, made working as a contractor and engaging them as a business incredibly difficult, causing major disruption to the UK’s flexible labour market. The rules have attracted significant criticism for causing employers to avoid using freelancers for fear of large tax bills, with one of the consequences of this being that many freelancers decided to take permanent jobs.

As a recruiter, I’ve experienced first-hand just how detrimental the change has been to both businesses and contractors. By their very nature, temporary recruitment requirements are not easy for businesses to forecast and often comes as a surprise. My job is to help them to solve their resourcing issues quickly and effectively at an often-challenging time.

But since the reform was introduced, it’s not been easy to do that. Instead of providing them with swift solutions, I’m now having to first interrogate those who are looking to hire on the way they’ll interact with someone they’ve not even met yet and who’ll be doing something they don’t really understand. It’s like asking someone who is drowning to recite the alphabet backwards before you’ll throw them a lifebuoy.

So, when the new Chancellor announced in the mini-Budget last week that the government intends to repeal the IR35 reforms, I, like millions of other people, could not have been happier. The end, it seemed, was nigh, for this dastardly piece of tax policy.

But here’s the thing: it’s not. Not yet anyway.

Still a long way to go

And now my concern is that some business leaders reading about the demise of the reform may take their eye off the ball when it comes to IR35 compliance. After all, it would be easy to conclude that its fate is sealed and that there is no longer a need to jump through the hoops and complete the necessary assessments. But employers would be wrong to assume that and risk making a costly mistake by falling foul of the current tax rules.

Because the painful reality of the situation is that the government has merely announced its intention to repeal the changes to the IR35 tax rules – there is a long way to go before it’s enacted, if indeed that ever happens.

Nothing will be repealed until the next Finance Act, with many ministers already briefing that they may rebel against it if the pound falls below the dollar. That scenario, as we all know, is looking all too likely now, with the pound dropping to a record low this week.

Keep an eye on the ball

My advice to businesses and contractors looking to prepare for the reform repeal would be to take an extremely cautious approach – it might never happen.

Sure, it’s great to have a transition plan ready for if the changes do come to pass, but the most important thing they can do right now is not take their eyes off the ball when it comes to ensuring they remain wholly compliant with current IR35 tax rules, regardless of their feelings towards them.

The same is true for contractors. Just because they are not accountable under the current reforms doesn’t mean that they don’t have a responsibility. As business owners in their own right, they must ensure that they are fully present and engaged with IR35 compliance as a basic courtesy to their clients, as well as to protect themselves should the repeal actually happen.

Because if, as a result of any repeal in April, contractors once again become responsible for paying the right amount of tax, HMRC won’t be taking any prisoners.

Interested in hearing more about how we can solve your challenges? We’d love to hear from you.

Man with short dark hair and beard wearing a shirt and jacket.

David Clark

Operations Director

David Clark