UK Government says IR35 tax reform is easy for contractors • The Register

Two-fifths of organizations hired fewer non-tariff workers under the new IR35 rules in September 2021 than in March 2020, according to a study published by UK tax collector HMRC, but critics say the results do not measure the true impact of the reforms.

The study was based on 353 interviews between November 2021 and April 2022. It showed that 41 percent of larger companies said they hired fewer non-tariff contractors than they did in March 2020. 35 percent hired the same number of freelance-payroll people, while 23 percent hired more. Almost half (47 percent) of plant-level organizations — that only manage their own tax affairs — had the same number of non-tariff contractors in March 2020 as in September 2021.

However, critics were quick to point out that the way the data was selected could skew the official results – with far greater implications than recorded.

IR35 reforms were rolled out to businesses in April 2022 after a one-year delay due to the COVID-19 pandemic. They placed the responsibility of determining tax status on employers, some unwilling to take the risk, and imposed blanket bans on the use of contractors. The rules were introduced in the public sector in 2017.

Learn more about the context and background of IR35 here.

The HMRC study, conducted by IFF Research, failed to paint a true picture of the disruption to IR35 as many organizations had already made their IR35 decisions in March 2020, prior to the last minute delay caused by COVID, said Dave Chaplin, CEO and Founder of the Tax compliance firm IR35 Shield.

“Many of the comparative figures in this report are inaccurate. Because on March 18, 2020, at the first reading of the finance law, [the government] announced that off-payroll reforms would be delayed by a year. With only three weeks to go before the expected launch date, most companies had already changed their workforce. Therefore, the periods from March 2020 to September 2021 compared in this report do not provide an accurate picture of the before and after scenario.

“Choosing March 2020 as the baseline is something of a statistical howler and means the report paints a less disturbing picture than what actually happened. But even then it’s not a nice read for HMRC.”

Chaplin also pointed out that HMRC originally estimated that the one-off administrative burden impact for 60,000 companies would be £14.4m and that running costs would be negligible. But the new report says the average cost per business would be just over £4,000, bringing the total cost to 60,000 businesses to around £240m, 17 times higher than HMRC’s estimate in its impact statement.

“This annual cost to UK businesses shows significant friction has been added to the flexible workforce, which will cost UK Plc. Questions need to be asked in Parliament as to why HMRC got this so wrong,” he said.

Matt Fryer, chief executive of freelancer platform Brookson Group, said: “Our concern is that a third of companies that work with contractors have spent little or nothing on ongoing costs to comply with the rules.

“Furthermore, over half of the companies reported that all of their contractors were completely outside or inside the rules, but in our extensive experience of expert assessments, this is very rarely the case.”

Seb Maley, CEO of employment insurance company Qdos, said HMRC research did not tell the full story of IR35 reform. “Read this report and you would think the payroll rules were simple. It’s another government study to add to the growing pile of those that don’t reflect the reality of the situation.

“We were told that half of the companies found it easy to comply with the non-tariff regulations and that around eight in ten companies assess IR35 status on a case-by-case basis. These statistics paint a nice picture, but I would take them with a pinch of salt. It is true that more and more companies are grappling with these rules, but it has been a difficult journey.”

IR35 even played a small role in Britain’s political melodrama that year. During his brief tenure as Chancellor of the Exchequer, Kwasi Kwarteng promised to abandon the reforms. The pledge did not survive his tenure – or that of Prime Minister Liz Truss. Jeremy Hunt – who replaced Kwarteng as chancellor in October – said he would reverse the repeal of IR35. ® UK Government says IR35 tax reform is easy for contractors • The Register

Rick Schindler

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