General Election 2024: Would abolishing the IR35 off-payroll working rules constitute a tax cut?

As parliament fast-approaches its dissolution this Thursday – May 30th, the UK is now officially gearing up for a general election on July 4th, writes Nigel Nordone, head of tax at Qdos.

While it’s not clear what pledges and promises will be made in this six week race, there’s one thing that never fails to attract voters’ attention -- the prospect of tax cuts.

We’ve already had two Budgets in a row which this government claims cut taxes

The last two fiscal events have been used by the government to reform National Insurance.

Granted, not exactly eye-catching, but both employees (including umbrella company contractors) and sole traders have benefitted from these NI changes to a degree.

But is there a bolder move that can win over self-employed voters?

The IR35 reform repeal that never was

I am, of course, referring to the off-payroll working rules, which Liz Truss and Kwasi Kwarteng planned to scrap, as prime minister and chancellor respectively, before they were shown the door by their own party.

While there have been no signs that any of the major political parties would look to abolish the controversial and reformed IR35 rules, it’s an interesting hypothetical which is almost bound to come up again and again between now and the July 4th poll date.

Where are we now with contractor taxation?

First, let’s start with a quick recap of where we are. 

Under the last two governments, taxes have gone up overall.

And contractors will feel like they’ve borne the brunt.

The tax-free dividend allowance has been repeatedly cut; the rate of corporation tax increased (from 19% to 25%), and while not a direct tax increase, the off-payroll working rules were introduced in the public and private sectors.

In short, it’s been a tough ride for freelance and contract professionals while there have been few tax cuts. In other words, a lot of stick, but not much carrot.

Waiting on the 2024 general election manifestos…

As a result, many individuals and businesses are already second-guessing the pre-election promises that the major political parties may make – the quickly written manifestos we’re all now waiting for even if the credibility of those documents seems weaker than in previous years.

From my perspective, with fiscal drag all but cancelling out the national insurance cuts, the electorate is very ready for meaningful policies of tax reduction.

But it’s not obvious what those might be, or at what cost.

And following on from the latter, the IR35 and OPW frameworks are no exception.

How much exchequer revenue is protected by the IR35 off-payroll working rules?

Despite some vague pledges made earlier this month by chancellor Jeremy Hunt in London – the most specific was further potential reforms to national insurance albeit not until the autumn of 2024, it’s not immediately clear where taxes could be cut.

It’s also currently difficult to see how the government, the Treasury or HMRC would agree on what to cut.

While many contractors and businesses are today unhappy with the off-payroll rules, the current government was hell-bent on introducing them. And despite its unpopularity, there are a few reasons that a government – current or incoming – might decide to persist with them.

HMRC has previously indicated that the off-payroll working rules would contribute around £3.8 billion a year to tax revenues by 2025/26.

This is equivalent to about 10% of the compliance yield HMRC says it generated in 2022/23 – a considerable return, even if it’s still a small proportion of the overall tax collected (£814bn).

What have the IR35 off-payroll working rules cost the economy?

It’s clear contractors have ended up paying more tax, either when working inside IR35 or via umbrella companies – something that in some cases is insisted upon by businesses, regardless of the contractor’s true IR35 status.

But dig beneath the surface and you have to ask, just how much has the introduction of the off-payroll rules cost the economy?

Much more than they have yielded, that I’m confident of. 

These IR35 reforms have had unintended effects, too. Some contractors decided to leave the sector altogether, whether choosing early retirement or leaving self-employment for permanent employment.

And what about the taxpayer? How much has HMRC spent on legal fees in its aggressive pursuit of high-profile contractors for perceived non-compliance?

Despite this last point, you could argue that IR35 isn’t necessarily a major issue for the general population – regardless of just how much of an impact it is having on some of the UK’s smallest (and biggest) businesses.

With this in mind, rolling back the IR35 reforms might not have the broad appeal of a sweeping cut to income tax, for example.

On those grounds alone, it seems unlikely that the UK government  -- current or incoming -- would decide to reverse the reforms. 

Low likelihood of an IR35 OPW rules rollback, even if it is now election season

Ultimately, then, it seems unlikely that the off-payroll rules will be axed.

Some personal history may be relevant here too. While we don’t know who will have the keys to Number 10 and 11 Downing Street on July 5th, the current prime minister (Rishi Sunak) insisted, when he was chancellor, on introducing the OPW rules in the private sector.

As for Labour, we don’t know where they truly stand on the IR35 /OPW legislation – although, that might become clearer once election manifestos are revealed in the coming days and weeks.

Final thoughts (on some big hypotheticals)

So is all lost? In a word, ‘no.’

True, the IR35 rules are far from ideal and continue to affect limited company contractors across the board.

However, as time passes, businesses are getting to grips with the changes – the dust is settling and more contractors are having their IR35 status assessed fairly.

Promisingly, HMRC has also been receptive to addressing and amending flaws in the legislation (belatedly, it must be said), such as the issue of ‘double taxation.’

All this means the reversal of the off-payroll working rules remains hypothetical; as does the question of whether such a move would constitute a tax cut. Although, as any contractor who has been impacted by these unwieldy IR35 reforms will tell you, it would.