It’s been a rough couple of years for business and, specifically, the self-employed. The pandemic and, depending on your viewpoint, the economic disruption of Brexit have taken their toll and forced businesses to close. Many of the worst affected have been the very smallest businesses – the self-employed. But these major shocks haven’t been the only problems faced by the sector. For some, the biggest issue has been entirely of the government’s own doing – the changes to the off-payroll working regulations, often referred to as IR35.
Implemented in April 2021, the changes to off-payroll working in the private sector have put hiring organisations in charge of making notoriously complex employment status decisions. It has shifted the responsibility for determining a freelancer’s tax status from individual freelancers to their clients and has caused mass confusion and uncertainty as a result. In fact, our research has shown that IR35 has been so damaging to freelancers that a third of contractors have been driven out of self-employment since the reforms.
The changes to IR35 have also negatively impacted hirers. It has put an enormous administrative burden on HR departments as they have been forced to make IR35 decisions based on flawed and overly confusing regulations. According to research by the Association of Independent Professionals and the Self-Employed (IPSE), the reforms have been so difficult to understand that almost half (48 per cent) of companies using a freelancer did not know the percentage of contractor engagements that were inside or outside IR35.
What’s more, the government itself has found it difficult to follow its own reforms following the change to off-payroll working in the public sector in 2017. Last year, HMRC issued IR35 penalties to a number of government departments including the Ministry of Justice and Department for Environment, Food and Rural Affairs (Defra) for failing to adhere to the legislation.
With even major government departments falling foul of the regulations, despite extensive help and support from HMRC and the Treasury, it is clear that more needs to be done to solve the confusion around IR35.
However, solving the issues around the reforms is easier said than done. Both the House of Lords Finance Bill Sub-Committee and the National Audit Office have outlined the flaws surrounding IR35 in reports released earlier this month to little avail. Furthermore, despite vigorous campaigning from a handful of organisations including IPSE, politicians on both sides of the house haven’t yet announced any proposals to solve the issues around the legislation.
For businesses and self-employed workers, the lack of action on IR35 is worrying. Freelancers provide companies with skills, dynamism and ideas and without any changes to the reforms, there are serious risks to the development and competitiveness of British business. Put simply, if IR35 isn’t reformed, then more and more self-employed workers could leave contracting, HR departments will continue to be forced to deal with needlessly complicated employment tax regulations, and hiring organisations – the companies that we rely on to provide employment and drive economic growth – will be robbed of the innovation and flexibility that contractors provide.
As we enter what we hope will be the post-pandemic world, it is essential that businesses and the government turn their heads towards forgotten crises such as IR35. The reform has quietly devastated self-employment and has put an administrative burden on businesses at a time when companies should be focusing on growth, economic recovery and ‘building back better’ – pick whichever government slogan you prefer.
We hope the government either commissions a review or reverses its stance on IR35 soon. If it doesn’t do this, then regardless of what the prime minister or the chancellor say about post-Covid recovery and Brexit opportunities, the government will have damaged the country’s long-term growth by causing further economic uncertainty for businesses and self-employed workers alike.
Andy Chamberlain is director of policy at the the Association of Independent Professionals and the Self-Employed (IPSE)