The off-payroll working rules have returned to the political agenda with Andrew Griffith MP vowing that the Conservatives would "look again at reforming IR35".
Reform of IR35 reforms: question, answer and guess
Is looking at reforming IR35 a realistic and sensible thing to do, or merely a potential vote-winning opportunity?
I guess the answer to this question is how far any reform of the IR35 reforms might go, writes chartered accountant Matt Fryer, managing director of Brookson.
If the off-payroll working rules raised you £4.2bn, would you abolish them?
Given that HMRC announced earlier this year that the IR35 reforms have raised around £4.2 billion in additional tax and NIC in the three years to March 2023, it would require a significant 'business case' to successfully argue for a complete abolition of the off-payroll working (OPW) rules, and a return to only the original IR35 rules being in force.
I do think, however, that several OPW/IR35 areas could be looked at to improve outcomes and fairness for all parties.
Six IR35 areas where off-payroll administrative improvements are needed
Broadly, the areas relating to OPW, IR35 and employment status that are screaming out for improvement are six-fold:
- How IR35 status is assessed. Aim: quash the uncertainty during and after.
- Redesign IR35 assessments. Aim: make them certain and fairer.
- Make 5 employment status quick-wins, including axing 'worker' status.
- Rebalance HMRC penalties under IR35/OPW.
- Boost IR35 'offset' awareness and know-how.
- HMRC to publish end-user case studies of IR35/off-payroll working investigations.
How IR35 employment status is assessed warrants review
One of the significant difficulties with the OPW rules in 2025 stems from end-hirers assessing IR35 employment status, and the uncertainty over and after the way that status gets assessed.
It's an IR35 difficulty that, unfortunately for end-users and contractors alike, I expect to continue in 2025-26.
If end-hirers get their IR35 assessments wrong over several years and a large number of contracts are in play, then there could be significant financial implications for those organisations and their supply chains.
Why Status Determination Statements are in the 'too difficult' box
In many cases, this fear from end-users of getting it wrong results in the Status Determination Statement process going into the "too difficult" box.
The result?
Organisations choose to ban their use of Personal Service Company contractors or blanket determine all contracts to fall "inside IR35."
Two big drawbacks of risk-averse IR35 hiring responses
While this two-fold 'risk averse IR35 response' eliminates HMRC risk for the supply chain, it either:
- vastly increases the cost of the engagement (as taxes are often factored into the fee), or;
- imposes a gross unfairness onto the professional contractor who has chosen to offer their specialist skillset on multiple client projects (it could be argued to be bordering on a restriction to trade and, in some instances, results in employment taxes being paid with no associated employment rights).
Either of these constitutes a bad look for the incumbent Labour Party.
Therefore, I think that a review of how IR35 employment status is determined, with the aim of making the IR35 assessment process more certain — and fairer — would be a good step forward.
Labour's employment status review will hopefully not be more of the same
An employment status review has been muted for many years now.
For example, the Office for Tax Simplification recommended that a statutory employment test should be explored back in 2015. And the Taylor Review of Modern Working Practices resulted in the Conservative government consulting on it in 2018, and again in 2022.
[Editor's Note: Interestingly for those interested in this space, Mr Taylor was yesterday appointed as chair of the incoming Fair Work Agency — what Labour has rechristened the 'Single Enforcement Body' as]
Despite these explorations, no easy answer for policy-makers has emerged.
Recent efforts to push status further out, following the Make Work Pay initiative, which was part of the current Labour Government's election manifesto and which led to the Employment Rights Bill, appear to confirm how tricky policymakers find this area.
Five ways the employment status conundrum can be solved
But I believe there are many ways in which what officialdom clearly sees as the employment status 'conundrum' could be approached:
- A statutory test;
- Sector-specific 'pre-programmed' determinations (similar to those in the Film and Broadcasting industry);
- An ability for organisations to gain 'pre-approval' from HMRC;
- A flat rate withholding tax or levy;
- Addressing the differences between NIC rates for the employed and self-employed.
Removing 'worker' status would be a good start
All of these ideas have been proposed and explored to varying degrees over the years. My view is that they all offer a better outcome for all stakeholders than the current set of IR35 rules.
At the very least, removing the status of 'worker,' introduced by European law in the 1990s with the Working Time Directive, would help to simplify status.
But the removal must be accompanied by additional measures to simplify the distinction between the remaining statuses of employed or true independent contractor.
Rebalance HMRC penalties
Under the current off-payroll working (OPW) rules, there is no tax or HMRC penalty risk for organisations if they incorrectly deem a contract to be "inside IR35."
End-users also face no HMRC penalty if they prevent an individual from working via their own limited company.
I acknowledge that this is a tough nut to crack, but re-balancing the risk associated with 'blanket' IR35 determinations is another area which could be explored.
This angle is one which I hear being discussed — a lot.
But I think implementation with a realistic chance of success would necessitate the method by which IR35 employment status is assessed being redesigned, to provide more certainty to hiring organisations.
HMRC must boost awareness of the 2024 IR35 'offset' rule
Perhaps a more practical, easier to implement short-term change would be for HMRC (and maybe us professional advisers) to ensure end-clients are much more aware of the 2024 rule that lets organisations hit with a tax bill for incorrectly determining contracts to be "outside IR35" to offset taxes paid by the contractor and their PSC.
This ability to offset vastly reduces the perceived tax risk.
And in my experience, once this statutory mechanism is fully explained to organisations, it results in them being willing to implement a Status Determination process. In turn, that opens up a far greater market for experienced contractors while, helpfully, also taking the heat out of pay rate discussions.
More visibility on HMRC enforcement
Although it is a tricky issue for HMRC to publicise due to taxpayer confidentiality, I would welcome some mechanism for organisations that have successfully navigated an HMRC enquiry under the OPW legislation into their IR35 assessment and SDS processes to be the subjects of case studies.
There is a real fear in some parts of the temporary recruitment market that HMRC are looking to trip up organisations and aggressively pursue tax if they use contractors.
My view? This is simply not the case; an organisation that has compliant processes and controls in place as part of actively managing off-payroll has nothing to fear from the taxman. This is perhaps easier to 'say' than 'do,' but if you are taking "reasonable care," you are home and dry.
TL;DR: The Conservatives' IR35 reform pledge; helpful or hoax?
In conclusion, it is clear that some MPs consider the off-payroll working rules to be ripe for reform. It is even clearer that IR35 and OPW are topics which will generate support (and votes) from a significant volume of those MPs' constituents, regardless of the political hues of those MPs.
What is not clear, however, is how any party in government would propose to undertake the reform of the IR35 reforms, despite a further commitment from the incumbent party to consult on this subject — again — by the end of 2025.
It would be encouraging if the HMT/HMRC officials and policymakers due to be involved in this pre-2026 consultation by Labour were to actively consult with those of us impacted by employment status and IR35, as there are many changes that I and others believe could be made to positively impact the UK economy.