Dave Chaplin is the CEO of the tax compliance firm IR35 Shield
Sir John Redwood MP has called for a reversal of the IR35 reforms, which came into effect in 2017 and 2021, stating that the self-employed have got a “bad deal.” Redwood’s observations are spot on. The legislation has damaging structural flaws to the economy, is holding back UK businesses, and punishing the flexible workforce. Its current state is unfair, misaligned with Conservative values, and impeding UK growth.
In my view, the Conservative Party has to act immediately and either fix or ditch the legislation to win back the trust of the self-employed and reignite the flexible workforce.
Regrettably, the IR35 reforms – or more formally, the Off-payroll legislation, Chapter 10 ITEPA 2003 – is unlikely to be ditched. A full repeal briefly appeared during last September’s mini-budget but was canceled by Jeremy Hunt. We are unlikely to see another u-turn.
However, the damaging structural flaws can be resolved via straightforward amendments to the law, which could form part of the upcoming Budget on 15 March 2023.
Embedded in the Off-payroll legislation is a dreadful double-taxation flaw. This defect results in contractors and firms paying taxes on the same money. The combined effect leads to effective marginal tax rates over 100 per cent. Furthermore, firms receive tax bills four times more than they should – surely, the antithesis of conservatism.
HMRC has known about the double taxation issue since March 2018. The flaw was one of the reasons why some backbenchers sought, but failed, to delay the legislation with an amendment vote at the 3rd Reading of the Finance Bill 2020 on 1 July 2020. But how were MPs, who are not tax experts, supposed to know this existed? HMRC’s associated impact statement on 3 April 2020 didn’t even mention it.
Even though MPs were voting in the dark, the buck stops with them. They need to take charge and quickly fix this calamity.
The error was identified on 2 February 2022 by the National Audit Office in its report, Investigation into the implementation of IR35 tax reforms, and subsequently picked up by the Public Accounts Committee on 21 February 2022, who quizzed HMRC CEO Jim Harra on the issue.
Oddly, when referring to the problem, Harra claimed, “From our point of view, it is very important that there is an incentive on the engager to get these determinations right.” He has a point, of course – I’m sure HMRC wouldn’t want anything bad to happen to a person’s business if they choose to hire someone as a freelancer, would they?
Or maybe Harra was caught off guard, doesn’t examine every line of legislation, and attempted to spare his department’s blushes. The latter option is more likely, but that doesn’t help firms under considerable pressure.
So where are we now? The Public Accounts Committee recommended in Lessons from implementing IR35 reforms that the structural problems needed addressing, which the Treasury confirmed in its response that it would indeed do to ensure that “HMRC does not end up taxing the same income twice.”
Unfortunately, Treasury didn’t commit to a timescale. The time is now.
However, the double-taxation flaw isn’t the only issue that needs fixing. So, if the bonnet gets lifted, more legislative fine-tuning can undoubtedly be achieved.
Fixes should also include removing the scenario where recruitment agencies end up being saddled with another firm’s tax bill, despite not even taking part in the decision process made by the firm hiring the freelancer. The current tax law means someone else pays when someone makes a mistake. I also don’t recall that being included in the impact statement, nor being a central design tenant of the UK tax system. It must be fixed.
Another fundamental unfairness imposed on the self-employed is the lack of an independent appeal route for individuals. Where a freelancer disagrees with the status classification made by the firm that engages them, the legislation dictates that the person can appeal – but, ironically, it’s the firm that marks their own homework.
Given the double-taxation issue, with firms either banning contractors or being understandably cautious, they are unlikely to change their minds.
The original plan was to put in place an independent route to appeal. However, it was shelved in favour of firms being the ultimate arbiters surrounding the decision about someone else’s tax status. This is despite not having the complete picture required to make what the courts refer to ‘as needing to be done’ – a full multi-factorial analysis that also considers the freelancer’s career.
HMRC invented the concept of a “Statement Determination Statement” to overcome the hurdles, which must be given to the freelancer, who then gets a chance to dispute it. But many of these lack detail, making it impossible to understand why and how the firm has reached its decision. This toothless process could be given more bite and resolved quickly with some minor legislative fixes.
Work can be done right now to fix these issues and get the wheels of industry turning faster. The instructions are simple. Act now. Remove glue. Apply oil.
Dave Chaplin is the CEO of the tax compliance firm IR35 Shield
Sir John Redwood MP has called for a reversal of the IR35 reforms, which came into effect in 2017 and 2021, stating that the self-employed have got a “bad deal.” Redwood’s observations are spot on. The legislation has damaging structural flaws to the economy, is holding back UK businesses, and punishing the flexible workforce. Its current state is unfair, misaligned with Conservative values, and impeding UK growth.
In my view, the Conservative Party has to act immediately and either fix or ditch the legislation to win back the trust of the self-employed and reignite the flexible workforce.
Regrettably, the IR35 reforms – or more formally, the Off-payroll legislation, Chapter 10 ITEPA 2003 – is unlikely to be ditched. A full repeal briefly appeared during last September’s mini-budget but was canceled by Jeremy Hunt. We are unlikely to see another u-turn.
However, the damaging structural flaws can be resolved via straightforward amendments to the law, which could form part of the upcoming Budget on 15 March 2023.
Embedded in the Off-payroll legislation is a dreadful double-taxation flaw. This defect results in contractors and firms paying taxes on the same money. The combined effect leads to effective marginal tax rates over 100 per cent. Furthermore, firms receive tax bills four times more than they should – surely, the antithesis of conservatism.
HMRC has known about the double taxation issue since March 2018. The flaw was one of the reasons why some backbenchers sought, but failed, to delay the legislation with an amendment vote at the 3rd Reading of the Finance Bill 2020 on 1 July 2020. But how were MPs, who are not tax experts, supposed to know this existed? HMRC’s associated impact statement on 3 April 2020 didn’t even mention it.
Even though MPs were voting in the dark, the buck stops with them. They need to take charge and quickly fix this calamity.
The error was identified on 2 February 2022 by the National Audit Office in its report, Investigation into the implementation of IR35 tax reforms, and subsequently picked up by the Public Accounts Committee on 21 February 2022, who quizzed HMRC CEO Jim Harra on the issue.
Oddly, when referring to the problem, Harra claimed, “From our point of view, it is very important that there is an incentive on the engager to get these determinations right.” He has a point, of course – I’m sure HMRC wouldn’t want anything bad to happen to a person’s business if they choose to hire someone as a freelancer, would they?
Or maybe Harra was caught off guard, doesn’t examine every line of legislation, and attempted to spare his department’s blushes. The latter option is more likely, but that doesn’t help firms under considerable pressure.
So where are we now? The Public Accounts Committee recommended in Lessons from implementing IR35 reforms that the structural problems needed addressing, which the Treasury confirmed in its response that it would indeed do to ensure that “HMRC does not end up taxing the same income twice.”
Unfortunately, Treasury didn’t commit to a timescale. The time is now.
However, the double-taxation flaw isn’t the only issue that needs fixing. So, if the bonnet gets lifted, more legislative fine-tuning can undoubtedly be achieved.
Fixes should also include removing the scenario where recruitment agencies end up being saddled with another firm’s tax bill, despite not even taking part in the decision process made by the firm hiring the freelancer. The current tax law means someone else pays when someone makes a mistake. I also don’t recall that being included in the impact statement, nor being a central design tenant of the UK tax system. It must be fixed.
Another fundamental unfairness imposed on the self-employed is the lack of an independent appeal route for individuals. Where a freelancer disagrees with the status classification made by the firm that engages them, the legislation dictates that the person can appeal – but, ironically, it’s the firm that marks their own homework.
Given the double-taxation issue, with firms either banning contractors or being understandably cautious, they are unlikely to change their minds.
The original plan was to put in place an independent route to appeal. However, it was shelved in favour of firms being the ultimate arbiters surrounding the decision about someone else’s tax status. This is despite not having the complete picture required to make what the courts refer to ‘as needing to be done’ – a full multi-factorial analysis that also considers the freelancer’s career.
HMRC invented the concept of a “Statement Determination Statement” to overcome the hurdles, which must be given to the freelancer, who then gets a chance to dispute it. But many of these lack detail, making it impossible to understand why and how the firm has reached its decision. This toothless process could be given more bite and resolved quickly with some minor legislative fixes.
Work can be done right now to fix these issues and get the wheels of industry turning faster. The instructions are simple. Act now. Remove glue. Apply oil.