IR35 controversy shines a light on UK's complex tax rules - Greg Wright

The Government’s initial commitment to repeal the controversial off-payroll rules was praised as a sensible measure by a number of analysts, who believed the approach which had previously been adopted was deeply flawed.

However, the new Chancellor Jeremy Hunt said he would no longer be taking forward a repeal of the 2017 and 2021 reforms to the off-payroll working rules – also known as IR35 – from April 2023. The Treasury said this move would cut the cost of the Government’s Growth Plan by around £2bn a year.

But what is IR35? And what impact is it having on the economy?

"IR35 is a reference to tax legislation and the rules relating to ‘off-work’ payroll,’’ said Glenn Hayes, an employment partner at Irwin Mitchell in Leeds.

This relates to an arrangement where individuals provide their services to an organisation through an intermediary such as a personal services company, Mr Hayes said.

He added: “The decision by Jeremy Hunt, to scrap the repeal of the IR35 rules means that most businesses and organisations affected will need to continue carrying out status determination statements when engaging individual consultants via intermediaries such as personal service companies and to pay any tax required.

“Failing to do so, or getting the status determination wrong, will mean companies will be liable for the tax and national insurance contributions. The 12 month grace period, which provided some leniency for organisations making genuine mistakes, ended in April. This means that if you make a mistake, you'll also have to pay penalties and interest.”

One man who contacted me, and asked to remain anonymous, said: “Even before the 2017/2021 IR35 changes, IR35 was far too cumbersome. I had multiple clients at the same time, so shouldn’t have had to worry about IR35, as it is always clear you’re not an employee, but some clients literally refused to sign IR35 compliant contracts as it changes the risk to them.”

"IR35 is there to stop someone sitting at a desk all day, for one client, when they really are an employee,’’ he added. “But the way it has been constructed, and now further worsened, means it is more or less impossible to work as a small limited business when you’re working for multiple clients and clearly aren’t an employee.”

The man believes IR35 should be reversed. He argued that any money HMRC claims it is getting from IR35 is offset by the money lost from small businesses to overseas suppliers or large consulting firms.

Dave Chaplin, CEO of tax compliance firm IR35 Shield, said the U-turn on the repeal has thrown around half of the genuinely self-employed contractors under the bus.

As Emma Rawson, a tax policy adviser with the Association of Taxation Technicians, wisely observed, the underlying problem relates to the UK's opaque and complex rules on employment and self-employment.

A repeal without a fresh approach to the issues surrounding IR35 and a commitment to provide HMRC with extra resources was always unlikely to provide a long term solution.

Greg Wright is the deputy business editor of The Yorkshire Post