Contractors ‘thrown under the bus’ by government’s IR35 flip-flop, say compliance firms

Self-employed contractors have been “thrown under the bus” by the government, a tax compliance boss has said after the chancellor pulled the plug on plans to ditch controversial off-payroll working rules.

The scrapping of IR35 reforms was announced last month by then-chancellor Kwasi Kwarteng as part of an ill-fated growth plan which sent currency and bond markets into chaos and ultimately saw him lose his job.

IR35 reforms were intended to clamp down on tax evasion but have been unpopular in the freelance-reliant construction sector and have seen repeated setbacks and complaints directed at HMRC’s compliance assessment tools.

The repeal, which had been due to take force from 6 April 2023, two years after the policy was introduced in the private sector, would once again have made freelance workers responsible for determining their own employment status and for paying the appropriate amount of tax and national insurance contributions.

But this morning, Jeremy Hunt, appointed as chancellor on Friday last week, revealed that the reforms were here to stay in a statement which reversed almost the entirety of the Kwarteng mini budget in a bid to instil confidence in the UK’s public finances.

According to the new chancellor, cancelling the reforms to IR35 would have cost £2bn per year by 2026/27, the government’s target for getting debt to fall as a percentage of GDP.

Dave Chaplin, chief executive of tax compliance firm IR35 Shield, said the government’s initial commitment to repeal the rules was “sensible” and would have “returned an essential level of certainty to contract transactions in the market economy”, resulting in economic growth.

“Instead, off-payroll will continue to cause significant harm to the self-employed, major businesses, the government and the economy,” he said.

“Whilst we agree that tax avoidance measures are sensible, the off-payroll rules over-extended, causing genuinely self-employed contractors to lose their rights to being their own boss.

“The Conservatives U-turn on the repeal has thrown around half of the genuinely self-employed contractors under the bus, and likely kissed goodbye to their success at the next general election.”

Chaplin added that in reversing their position, the government had joined the “anti-growth coalition” – the moniker given by Truss to the number of think tanks, media organisations, politicians and activist groups who opposed the Kwarteng growth plan.

Crawford Temple, chief executive of compliance firm Professional Passport, said the off-payroll rules were “ill-thought-through and damaging” and called for “a considered approach and a proper review that Liz Truss promised as part of her ministerial campaign”.

Brendan Sharkey, head of construction and real estate at MHA, said scrapping IR35 would have “reduced red tape and helped with concerns over engagement of labour when it is in especially short supply” in construction.

He said that the repeal would have “helped to drive recruitment at exactly the right time”, with freelancers who supposedly left the industry when the rules were introduced to the private sector in April 2021 looking to work in response to cost-of-living increases.

And Russell Upton, director of key accounts at umbrella payroll firm Parasol, said: “After a lot of confusion for contractors over the past few weeks, it seems we finally have some clarity on how agencies and end clients should deal with IR35.

“Today’s announcement was somewhat inevitable, especially as the original mini-budget did not come with a fully-costed plan and was not put in front of the OBR.

“This means IR35 reform and practice will stay the same as before the mini-budget, with contractors continuing to receive a SDS from the end client, who will retain the responsibility of determining whether the assignment is inside or outside of IR35.”