8 October 2021

Unfair, expensive and anti-enterprise – scrapping IR35 is long overdue

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There used to be an assumption that an employee would work for the same outfit in the same building – Monday to Friday, 9 to 5 – often for decades. But with mobile phones, personal computers and flexible working, that had already become rather old-fashioned long before the message last year to work from home, if at all possible, as a moral imperative. 

By contrast, it might be that someone who is self-employed might have only one client and be working for them full time – at least for a few months. 

According to the Office of National Statistics, there are 27.8 million employees in the UK, compared to 4.3 million are self-employed. The number of self-employed had been rising steadily – from 3.2 million in 2000, 4 million in 2010 and then 5 million in 2019. But just recently it has slipped back. ‘Ah, the pandemic,’ you might say. But the number of employees has actually slightly risen over the same period. 

What has been happening is that HMRC has been mounting an undeclared war on those with the pluck to go it alone, be their own boss and take risks – foregoing the safety of holiday pay, sick pay, regular house and a regular income – in the hope that it will bring rewards. 

The favoured method of bringing them to heel is called IR35. This was legislation introduced by Gordon Brown when he was Chancellor to tackle ‘disguised employees’. It did so by reclassifying contractors who worked with a single client as ‘deemed employees’, with a higher tax bill as a result.

In opposition the Conservatives were indignant about this onerous impediment to enterprise. In their 2001 manifesto they promised ‘to repeal the tax on IT consultants, the notorious IR35, which has driven away from Britain some of our most productive workers’. 

Nine years later the Conservatives had finally returned to power. Their Coalition Programme for Government, with the Lib Dems stated:

‘We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.’

Since then, however, matters have actually got worse. HMRC have made the ‘compliance’ requirements more draconian, the complexity more impenetrable, the paperwork more oppressive. The main problem with IR35 is that it unfairly affects the smallest companies: freelancers. Numerous sole traders who legitimately use a limited company model to supply services have been falsely accused of ‘disguised employment’. 

It also mixes up the reason people choose to become self-employed. As the Association of Independent Professionals and the Self-Employed notes: 

‘Contractors enjoy the variation and flexibility of assignments, they enjoy the choice of the tasks they take on, they enjoy being able to dip in and out of contract. They often cite office politics and a dislike of hierarchical structures as the reason they want to stay as contractors. They rarely refer to taxation as a reason for being a contractor, but they do recognise that there is, as there rightly should be, a reward for being in business and taking on all the risks that entails.’

Then there’s the burden of IR35 investigations, which the Association says can be ‘long, intrusive and extremely costly’, with the added risk of reputational damage for contractors.

There is a work-around of sorts available: those who want flexibility and to stay within the rules can be employed by agencies. The problem there is that a big slice of a contractor’s earnings can be swallowed up by commission. 

As time has passed, more and more self-employed workers have been cauight in the IR35 web. First they came for the IT nerds. Then the Government had a clampdown on NHS contractors – a restriction which has proved disruptive and costly.

More recently it has been lorry drivers bearing the brunt. In April of this year, new rules came into force for medium and large private sector employers. It means that hauliers who turn over more than £10m per annum or have more than 50 employees can no longer hire drivers who are working as a limited company. Though some want to pin everything on Brexit, a survey by the Road Haulage Association found large hauliers saying IR35 was ‘the main reason for the current driver shortage crisis’.

This is not just a problem of ministerial short-sightedness, but of a failure to hold arms-length government bodies to account for damaging policies. HMRC styles itself ‘a non-ministerial department of the UK Government’ – which seems wholly unsatisfactory, given the power it wields. Indeed, far too much of what the state does lacks proper accountability, with agencies and quangos given free rein to set their own policies without serious democratic scrutiny.

I used to think that the attack on the self-employed was a political project by the Labour Government. One can see the problems a growing self-employed sector offers for traditional socialists. How many will be interested in joining a trade union? It doesn’t really fit in with the ‘them and us’ rhetoric of the class war if boss and worker are embodied in a single person. But now it seems that the administrators are the real problem. Whether the Chancellor happens to be Gordon Brown, Philip Hammond or Rishi Sunak makes little odds. 

Perhaps the current supply chain logistics crisis will prompt ministers to sit up and take notice. And rather than just scrapping IR35, they should introduce a new right to be self-employed. Anyone should be able to agree with his or her employer that he or she is henceforth to be treated as self-employed and HMRC should not have the power to disrupt such arrangements. 

That clear declaration would help to ease the supply chain pressures and so get the petrol pumps back in action and the threat of a frugal Christmas averted. It would also send a clear signal to the beleaguered and bewildered entrepreneurial contingent in this country that the Conservatives really were on their side.

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Harry Phibbs is a freelance journalist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.