Whoever leads it next, the government needs to stop the IR35 and employment status merry-go-round
Most people agree that the employment status rules here in the UK are too confusing, yet there is little agreement on what we should do about it.
Every promise, speech and government review has seemingly ended in disappointment, inaction and the continuation of the status quo.
And for those concerned with IR35, that means they remain stuck in a never-ending cycle of unfairness and complexity, writes Andy Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE).
Four years, 22 years, too late
Take the government’s response to the Matthew Taylor Review. Despite a number of positive recommendations -- including clarifying the employment status rules -- there has been little to no appetite from the Department for Business, Energy & Industrial Strategy and the government at large to follow through on the report’s proposals. In fact, it has taken more than four years for the government to publish its response to the four-year-old employment status-centered consultation.
Rather than grasping the nettle and providing some much needed clarity, the government has opted to keep the existing rules in place, saying that ‘now is not the right time’ to overhaul the employment status frameworks for rights and for tax. Well, we at the association believe that now is exactly the right time (although 22 years ago would have been even better).
To say the least, we are bitterly disappointed by the government’s response. The government response kicks the can down the road and doesn’t provide any solutions to one of the most important issues impacting, not just the lives and financial well-being of freelancers, but the whole supply chain.
The impact of employment status on IR35
Since last year’s reforms to IR35 in the private sector, medium and large-sized hiring organisations are the ones who have had to grapple with the opaque status rules. Those deliberations determine whether an engagement is inside or outside IR35.
The lack of clarity around employment status, has resulted in risk-averse hirers incorrectly determining IR35 applies in thousands of cases. As lots of you reading this will be acutely aware, many organisations are so scared of getting IR35 status assessments wrong, they refused to hire contractors altogether. The so-called ‘blanket ban’ approach to the off-payroll rules.
Wrong determinations are incredibly damaging to contractors. According to our research, four in five contractors (80%) working inside IR35 have seen a drop in their quarterly earnings – by an average of 30%. Some of those affected have even said their income dropped by over 40% -- a fall in earnings that could be highly damaging to thousands of self-employed workers during a cost of living crisis.
But the rules are also a nightmare for the UK’s organisations that use contractors and depend on them for their skills. Our research found that almost one in two (47%) businesses have reported a significant administrative burden since IR35 came into effect last year. And in the current climate of skills shortages, where clients are desperate to resource projects, they need the IR35 burden like they need a hole in the head. IR35 is a barrier to innovation and growth – it’s as simple as that.
Solving the status crisis
The simplest and most effective way to solve this problem is to scrap IR35 altogether – certainly that would be our preferred option. But if that is unpalatable to government, one thing they could do is to help hirers and contractors by clarifying the status rules. If employment status decisions were made easier, then businesses and self-employed workers would find IR35 more manageable to comprehend. Rather than taking up valuable time going through contracts, freelancers and their clients would be confident in knowing whether contracts are inside or outside IR35.
The government needs to get off from its own employment status and IR35 merry-go-round. In other words, self-employed workers need less talk, and more action. Contractors don’t have the time to wait for politicians to make empty promises or consultations to solve their issues. Instead, contractors need a clear path forward by the government to solve this issue.
Rather than another consultation, the business department, HMRC and the Treasury need to finally come together and define the employment status of self-employed workers. If they don’t, then they will let employment status confusion and IR35 continue to severely damage one of the most innovative and dynamic parts of the UK economy.