Westminster is being told it must do more to support the “entire flexible labour market” after dropping plans to repeal IR35 tax rules.
Employment experts have had their say on Jeremy Hunt’s decision not to move ahead with proposals, announced just last month, to roll back the controversial off-payroll working rules.
It was one of a number of U-turns on measures included in the September mini-budget unveiled by the Chancellor on Monday.
Short lived jubilation
As part of her bid to become Prime Minister, Liz Truss pledged to carry out a review of the current IR35 laws earlier this year.
Then, in something of a shock move, the then-Chancellor Kwasi Kwarteng announced last month that the reforms, which came into force for the public and private sector in 2017 and 2021 respectively, would be axed next year.
Oil and gas firms and contractors, who have long flagged the damaging complexity of the current rules, enthusiastically welcomed the move.
But while the decision to reverse the pledge was swift, some think the writing has been on the wall in recent days.
Simon Cowie, managing partner at award-winning Aberdeen accountancy practice Infinity Partnership, said: “The U-turn of IR35 reforms does not come as a huge surprise. The indicators have been there over the past few days. The main thing now is clarity moving forward.
“Navigating tax rules is challenging but Infinity Partnership has been and always will be here to help businesses and contractors with their IR35 compliance.”
The current and remaining rules
Under the current rules, now set to remain in place, businesses are responsible for deciding how they use personal service companies, or contractors.
If they role they carry out is more like that of a regular employee, known as inside IR35, they have to pay a higher level of tax.
Firms also face hefty fines from Her Majesty’s Revenue and Customs for getting it wrong.
A silver lining for employers and contractors is that, with the repeal previously slated for next year, many will have only been in the early stages of preparations.
But with an end to the reforms having been dangled in front of the industry’s face, Mr Hunt’s statement will still be a bitter blow to many.
In order to support energy firms and freelancers, the government is being urged to give clarity on its long-term plans for IR35.
Matt Fryer, managing director of Brookson Group, said: “Uncertainty isn’t helpful for hirers or contractors, particularly in today’s economic climate. At least retaining the current off payroll working rules takes us back to the position we were in a few weeks ago and gives us a bit of certainty. However, it is clear now that the Government acknowledges the current rules aren’t working as expected.
“If the rules stay in place exactly as they are, more needs to be done by HMRC in terms of education and support for the entire flexible labour market. In the meantime, hirers, recruiters and their supply chains must ensure they are complaint with the rules currently in place. The IMF and markets have strongly indicated that the Treasury must rebalance the books through taxation, so HMRC will be proactively seeking to recoup tax liabilities in the years to come.”
Preserving the status quo
While the intention of the reforms is to stop so called ‘disguised employees’ from paying less tax, studies have shown other negative knock on effects.
Research, published a year into the new system, found that the intricacies of the IR35 rules were putting businesses off using contractors.
Meanwhile, around half of freelancers had thought about closing their businesses, retiring, or leaving the UK entirely due to the reforms.
But, with contractors and employers increasingly becoming used to the new way of working, it has been suggested the decision to repeal the reforms may not have had a huge impact.
Mark Hammerton, partner in employment at Eversheds Sutherland, said: “Our view was that the repeal of IR35 would not affect quite the sweeping changes many might have anticipated.
“For example, a return to the ‘good old days’ of usage of personal service companies was in any event unlikely, since end user clients have now implemented and rely upon processes and controls on their labour supply chain as a result of the IR35 rules.
“A repeal of the IR35 rules would also not have removed a substantial risk to employers that HMRC would continue to scrutinise their practices, and it could use other parts of the tax code to take action, particularly where it believed end users were acting irresponsibly in respect of their supply chain.”