Chancellor says early IR35 enforcement will not be ‘heavy handed’

Government promises ‘soft landing’ for the first year of private sector off-payroll changes to give businesses and contractors time to adjust

The government will not be “heavy handed” over changes to off-payroll regulations for the first year after implementation, the chancellor has promised. 

Rishi Sunak (pictured) told attendees at an event in Birmingham that changes to IR35 off-payroll working rules in the private sector would have a “soft landing”, and tax officials will be lenient in giving businesses and freelancers time to adjust to the shift.

Seeking to reassure both employers and contractors, who have raised concerns that the change would have a damaging effect on recruitment and retention of talent, Sunak said: “I’ve spent time with HMRC to ensure [it is] not going to be at all heavy handed for the first year to give people time to adjust as well, which I think is an appropriate and fair thing to do.”

He added that a government review into the implementation of IR35 in the public sector, which is due to begin imminently, would lead to “tweaks and improvements to make sure that the transition is as seamless as possible”.

Under IR35, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid similar tax regardless of whether they are an employee or contractor.

The changes to IR35 in the private sector, which come into effect in April, will shift the responsibility of assessing which contractors fall into this category on to employers. The changes have applied to public sector employers since 2017.

Get more HR and employment law news like this delivered straight to your inbox every day – sign up to People Management’s PM Daily newsletter

Samantha Hurley, operations director at the Association of Professional Staffing Companies and co-chair of the government’s IR35 Forum, welcomed Sunak’s promises. She said this was a sign the government “wasn’t on a witch hunt”, targeting freelance contractors and organisations that historically relied on a self-employed workforce.

“A ‘soft landing’ sounds good, if this is a nod towards a period of three to six months in which companies will have time to adjust to the new rules and not be penalised,” Hurley said. “We still don’t have final legislation, but it’s due to go live on 6 April, so a period of time within which recruitment businesses and end clients wouldn’t be penalised would be welcomed by our members.”

But businesses and freelance membership bodies said a light touch in the first year of the change was not good enough, and many companies remain ill-prepared for the changes.

Andy Chamberlain, deputy director of policy for the Association of Independent Professionals and the Self-Employed, said the fact the government plans to give IR35 changes a “soft landing” suggests they understood how disruptive the policy will be for businesses. 

“Taking a light touch early on will not mitigate the immense damage the changes to IR35 are going to do to contractors, their clients and the wider economy,” Chamberlain said. “If the new chancellor really wants to improve the situation, he must halt and fundamentally reassess this disastrous legislation.”

Tom Hadley, director of policy at the Recruitment & Employment Confederation, said the announcement made it “even less clear where employers stand” after IR35 legislation comes into effect, and it was critical that the government gave employers certainty in the run up to implementation. “With so little time afforded to them by the Treasury, it’s highly unlikely that all employers will be prepared for IR35.

“The chancellor’s announcement implicitly recognises this, but ‘light touch’ enforcement would simply create an unlevel playing field with compliant employers and recruiters being undercut.”

Recent research by recruitment firm Robert Half suggested a majority of medium and large employers were concerned IR35 would affect their access to talent, and they would potentially miss out on skilled contractors and temporary professionals. 

The poll of 398 senior decision-makers in medium and large-sized businesses, conducted in October 2019, found more than three in five (62 per cent) organisations were either very or somewhat concerned about attracting temporary workers after the changes to off-payroll tax rules come into force in April.

Additionally, 42 per cent of respondents were concerned they would lose contractors they currently work with if their role was deemed to be covered by IR35, citing concerns about renegotiating contracts in time.