British innovation at risk if IR35 reforms go ahead

By Andrew Chamberlain
Political Correspondent

Andrew is the deputy director of policy at IPSE

Thousands of freelancers working in the private sector could face paying billions of pounds extra in tax after the government announced it would be pushing ahead with its proposed changes to the off-payroll tax rules (IR35).

The new rules, published by HM Treasury (HMT) in the draft Finance Bill, will mean from April 2020, companies that hire contractors will be responsible for determining IR35 status. Anyone deemed inside IR35 could face higher tax bills.

The changes to the legislation, which was originally introduced in 2000, are designed to crack down on so-called disguised employment. However, the Association of Independent Professionals and the Self-Employed (IPSE) has warned that this could threaten British innovation and create a form of second-class employment.

Research by the Centre for Research on Self-Employment (CRSE) has found that freelancers drive innovation and could improve productivity. They provide flexible and highly skilled expertise to businesses and the IR35 reforms could have a serious impact on this.

In April 2017, government introduced similar changes to the off-payroll tax rules in the public sector, which is expected to bring in an additional £1.3 billion in taxes over four years. Following the reform, there was major controversy about blanket assessments, where all engagements are deemed to be ‘inside’ IR35 without a proper consideration of the facts. As a result, several projects were delayed due to contractors voting with their feet and leaving. Now, there are concerns the private sector measures could damage businesses.

"People who are not complying with these rules are not paying their fair share of tax"

For example; high street banks which engage hundreds, perhaps thousands of contractors, may be tempted to carry out blanket assessments as a means of minimising the tax liability. Such an approach is likely to create major disruption and could discourage contractors from engaging with these companies.

A HMT spokesperson told Freelance Corner: “It’s right – indeed essential – that individuals working side by side in a similar role for the same employer pay the same employment taxes, and our draft legislation cements our commitment to a fair tax system.

“People who are not complying with these rules are not paying their fair-share of these employment taxes. Which means our hospitals, schools and other public services are missing out on vital funding.”

IPSE calls for IR35 reforms to be postponed

In response to HMT, Chris Bryce, IPSE CEO, said: “These changes will result in the notoriously complex IR35 rules being inaccurately applied to the genuinely self-employed. Independent contractors will be forced into an inappropriate tax bracket, with no effective route to appeal a wrong decision.

“Heaping the burden of determining status on to clients is a cynical attempt to ensure over-compliance with the rules, which means HMRC will be collecting tax it is not legally entitled to.

“Government claims that non-compliance is commonplace, but this must be called into question in light of HMRC’s abysmal recent record in court. It has lost six of the last seven IR35 tribunals that have come to light – demonstrating HMRC’s warped view of status and strongly suggesting it doesn’t understand its own rules.”

In a consultation response, IPSE has called for the IR35 changes to be postponed until businesses have been given time to put proper processes in place to ensure accurate determinations are made, and a full impact assessment has been carried out on the effect of the rules in the public sector.