IR35: Why change is needed

Since the rollout of the off-payroll working rules into the private sector on April 6th 2021, the legislation has raised many concerns for us, including the negative impact on the flexible workforce, the real risk of double taxation, and the unfair financial liability faced by recruitment companies, writes Shazia Imtiaz, general counsel at the Association of Professional Staffing Companies (APSCo).

Seeming to share our concerns, we saw the government under Liz Truss’s premiership initially repeal the off-payroll rules in the summer of 2022, only for a disappointing U-turn to be announced just weeks later.

The off-payroll rules simply aren't working

Fast-forward to today and what has become apparent is that IR35 in its current form is simply not working. The 2017 and 2021 legislation is unjust to the recruitment sector in that although the end-client is responsible for determining IR35 status it leaves the recruiter – who is usually the ‘fee-payer’ under the legislation – liable for paying any resultant tax liabilities to HMRC.

There is also a risk of double-taxation in the chain, with recruiters losing out as the fee-payer. The current legislation is being applied so that HMRC notifies the worker that they may be entitled to overpayment relief, namely a tax refund, but there is no mechanism to set this off against tax payments made by the deemed employer (which is often the recruiter). This is arguably in breach of HMRC’s charter to tax fairly.

We're hopeful for an offset consultation

While we don’t foresee that fundamental reforms will be implemented in this parliament, it is APSCo’s view that this issue of double-taxation needs to be a priority in any reforms, and we are optimistic that this will be on the government’s agenda for the near future.

There are, however, several other flaws to the reformed IR35 legislation which need to be addressed. As a case in point, despite rumours of a CEST 2.0 tool being announced, this hasn’t yet come to fruition. We stand by our previous calls to overhaul the HMRC tool to ensure it is fit for purpose and ensures determinations are being made accurately and account for the nuances in contractor work.

There is also the issue of a lack of legal clarity around highly skilled self-employment and the caveats that should apply to this group. The flexible labour market is made up of a significant range of individuals all employed in different ways. Those in blue collar roles will need different legal protections to those in the highly skilled remit, but as of yet, this is not accounted for in current employment and tax legislation.

Skills impact has been, still is, and threatens to continue to be significant

Grouping all contractors under one banner and using one set of tax rules to determine their status is only going to have a negative impact on skills availability. HMRC’s report on the impact of off- payroll on the private and voluntary sectors last year revealed that around 250,000 workers have moved from being paid through their own PSC payroll to another organisation’s payroll between October 2019 and March 2022. While the report does suggest that just over half (rather than all), were a direct result of IR35 reform, this number is still significant given both the ongoing shortage of highly skilled UK contractors, and the country’s limited appeal to international contract professionals and independent workers.

A flexible workforce is a critical component for the UK’s economic growth and creating an environment that does not recognise the differences between the needs of the highly skilled flexible labour market and those in need of protection under Agency Worker Regulations will be detrimental to the skills agenda. The fact that the report also suggests that a large number of individuals across specialisms that have been hit by skills shortages such as scientific and technical, mean that businesses have lost access to flexible workers who will have been crucial to growth and project requirements. 

Finally, some barriers that look difficult to overcome

While reform is needed, there are a number of barriers preventing the level of change that the recruitment and contracting sectors would like. It cannot be ignored that HMRC’s impact report published in December of last year, estimates an additional £1.8 billion of tax was generated between October 2019 and March 2022 as a result of off-payroll.  

With the uncertainty that the current parliament has seen over the course of the last few years, we do not expect that any further changes will be announced in the near future for fear of upheaving the labour market once again. However, as has been proven in recent history, the unexpected can happen.