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IT contractors are among the freelance workers calling on the government to consider scrapping the controversial IR35 off-payroll working rules in the March 2024 Spring Budget.
The IR35 rules were introduced at the turn of the millennium as part of a disguised employment clampdown by the government, geared towards preventing individuals from artificially minimising the amount of employment tax they are liable to pay by posing as contractors when the type of work they do means they are essentially employees of a company in all but name.
As such, the rules meant contractors had to self-declare whether or not the work they do and how it is done means they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35).
If a contractor is classified as being outside IR35, this means they pay taxes as a self-employed individual, but if they are deemed as being inside IR35 they will be taxed in the same way as a permanent employee, meaning they can pay up to 30% more in tax.
The way the rules work was subjected to reform in April 2017 in the public sector, resulting in contractors ceding responsibility for determining how they should be taxed to the public sector bodies that engaged them. The same reform was rolled out to the private sector several years later.
The change was justified at the time by HM Revenue & Customs (HMRC) to stop contractors deliberately misclassifying themselves as being outside IR35 to reduce their employment tax burden.
In the wake of the IR35 reforms, many end-hirers struggled with the added administrative burden involved because the changes meant they had to individually assess every contractor they engaged.
This, in turn, prompted many public and private sector employers to introduce hiring bans that prohibited them from using contractors.
According to a survey, featuring responses from 900 IT contractors, conducted by IR35 insurance provider Qdos, more than two-thirds of contractors want to see the IR35 rules scrapped, with nearly 50% of participants citing the reform as a cause of poor business performance in 2023.
Seb Maley, CEO of Qdos, said the IR35 rules continue to be a contentious issue for contractors, and one the government repeatedly faces calls from flexible workforce stakeholders to address.
“Every year, the complex and confusing IR35 legislation stands out as the one freelancers and contractors want addressing most by Westminster. But time and time again, the powers that be choose to bury their heads in the sand,” said Maley.
“With the Spring Budget rapidly approaching, if repealing the legislation is out of the question, at the very least the government must resolve the major issues relating to IR35 and the off-payroll working rules.
“From completely overhauling HMRC’s flawed IR35 tool, CEST, to helping ensure businesses carry out well-informed and compliant IR35 decisions, there’s a lot of work to be done on the IR35 front this year.”
Read more about IR35
- HMRC stands accused of needlessly drawing out an IR35-related investigation into an engineering contractor’s tax affairs by ignoring the findings of its own Check Employment Status for Tax tool
- Latest tranche of data from IR35 Shield’s Impacts survey suggests enterprises are increasingly seeking out alternative methods to assess the tax status of contractors rather than rely on HMRC’s CEST tool.
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