IR35 – Tackling differences between treatment of employment statuses is key

Commenting on today’s government announcement that recent reforms to off-payroll working (also known as IR35) rules will be retained, the Chartered Institute of Taxation (CIOT) has called for a strategic review focused on tackling the underlying factors which incentivize contractor over employment relationships.

Reforms made in 2017 (for the public sector) and 2021 (for the private sector) require businesses engaging workers through a personal service company (PSC) to determine whether off-payroll working rules apply. If they do then the engaging business is required to deduct payroll taxes on the payments made to the PSC. Previously it was down to the individual worker to determine if the rules applied.

In the 23 September statement (The Growth Plan) the Government announced the 2017 and 2021 reforms would be repealed, meaning it would once again be up to individual workers who provide their services through a PSC to decide whether the rules apply, and ensure the appropriate income tax and national insurance deductions are made.

Government costings put the cost of this change at more than £2 billion a year by 2026-27. Today’s statement means the 2017 and 2021 reforms will be retained.

Commenting, CIOT Director of Public Policy John Cullinane said:

“Rather than a tug of war over where responsibility lies for ensuring contractors and freelancers pay the right amount of tax, what is needed is a more strategic review of the taxation of labour to address the factors which make this so contentious. The aim should be to minimize the differences between being taxed as an employee, as self-employed and contracting via a company, or at least making the distinctions clearer.

“The 2017 and 2021 Off-Payroll Working rules have undeniably been problematic. Reversing them would have reduced compliance burdens for big business, but it would not have solved the problem of IR35. It would just have placed the burden of compliance back on small independent contractors and freelancers, leading to either widespread non-compliance, or to costly compliance activities for HMRC and a lot of pain for contractors having to defend their status assessments or face significant penalties from misunderstanding complex rules.

“Employment status is a complex area, as illustrated by cases such as those involving Adrian Chiles, Kaye Adams and Lorraine Kelly as well as the Premier League Referees case (PGMOL) which is heading to the Supreme Court next year.

“The biggest element of the differential between the tax burden on employment as compared to self-employment is employer’s national insurance. Whether at 15.05 per cent (the current rate) or 13.8 per cent (the rate it will fall back down to next month) this creates a significant incentive for employers to try to engage with people ‘off-payroll’.

“Consultation is needed not only on the future of IR35, but also on how the employment status of a worker is established for tax purposes and what the differences should be in the taxes paid of the different status.

“If the political choice is to retain such differences there is all the more need for clear statutory definitions to help workers and companies alike understand the distinction between employment statuses.”