IR35 reforms: what you need to know

As you might have seen, Britain’s latest chancellor, the fourth in as many months, U-turned on the U-turn to scrap reforms to IR35. Jeremy Hunt said the government would no longer be proceeding with reversal of the off-payroll working reforms introduced in 2017 and 2021. He claimed the move would help to “support confidence and stability”.

His predecessor, Kwasi Kwarteng, who was chancellor for all of 38 days before getting the heave-ho, had pledged to scrap the reforms to free up time and money for businesses that engage contractors and minimise the risk that genuinely self-employed workers are impacted by the rules.

But Mr Hunt tore up the pledge, along with virtually everything else in the former Prime Minister Liz Truss’ short-lived Growth Plan, apart from the stamp duty and National Insurance cuts.

We have warned for years the IR35 reforms amounted to bad legislation.

A 2022 report from the House of Commons Public Accounts Committee backed up our concerns, finding that HMRC rushed implementation, provided poor guidance and even government departments struggled to assess the status of their contractors.

Businesses spent a lot of time and money preparing for the changes, analysing their use of limited company contractors and moving a few of the senior ones onto the books as employees. In our experience, we found that many limited company contractors were paying unnecessarily high accountancy fees for not a huge amount of benefit and could easily become sole traders instead, reducing the cost and complexity of doing business and removing any risk of IR35.

The 2021 reforms, which shifted the risk onto end users, had some unwelcome unintended consequences.

Some businesses found the rules so complicated they needlessly brought in zero self-employment policies, which shrunk their supplier base and led to increased costs. The added confusion about liabilities created a vacuum for bad advice and many companies fell prey to sharks. The reforms also damaged Britain’s attractiveness as a work destination for highly skilled European professionals such as engineers, urban planners, CAD technicians and surveyors. Even worse, the rules pushed lots of decent people into legally dodgy and highly exploitative PAYE umbrella schemes, especially in the banking, technology and accountancy sectors. This has become such a big problem the government issued a call for evidence on the umbrella company market, warning that it was aware of non-compliance with tax and employment law.

Even though we put a lot of work into preparing for the IR35 reforms, we believed that scrapping them was the right thing to do for the UK economy. But as they stand, the rules don’t make much difference to our clients in the construction industry because most of them have a turnover of less than £10.2m. For Hudson Contract clients, it is business as usual.

Looking ahead, the many ways that HMRC constantly seeks to attack our industry’s use of self-employment, the scrapping of the red diesel rebate, the introduction of the disastrous VAT domestic reverse charge and the promotion of procurement policies that lock out small and medium-sized contractors all suggest the government sees construction as a cash cow that needs milking. Tax inspectors have a formidable legislative arsenal of weapons at their disposal to tackle what they see as false self-employment, and with hundreds of new enquiries opened every day, it is clear they intend to use it.