Ken Phillips is Executive Director of Self-Employed Australia and has been a leader in self-employed rights advocacy in Australia and globally for more than 25 years. His work resulted in the Australian Independent Contractors Act (2006), sham contract prevention laws and Unfair Contract laws for self-employed people (2016). He has a strong focus on tax fairness. Ken has studied the IR35 issue since 2000.
Ken shares his views on the recent UK developments regarding the announcement to repeal the Off-payroll reforms:
Off-payroll was a political cancer for the Conservatives
The signalled repeal of the Off-Payroll tax rules by the new UK Chancellor Kwasi Kwarteng is an exercise in long overdue common sense. It also demonstrates a measure of justice in how the Truss government treats the UK's 4 million or so self-employed, small business people
The UK tax administrator (HMRC) has been smashing UK self-employed people for too long. The 2017 Off-payroll tax rules and their extension in 2021 to the private sector have been a vicious weapon wielded by the UK tax authority, HMRC, with a discriminatory approach to self-employed people.
What drove the repeal appears to be a realisation that the UK laws were doing significant harm to the UK's economy. But more, the issue was cancerous for the Conservative Party's political future.
HMRC has viewed self-employed people as tax dodgers
The UK issue goes back to 2000. Self-employed people in the UK are taxed differently from employees. Depending on the calculations, self-employed people appear to be paying less tax or are double-taxed.
In 2000 the IR35 laws were introduced that enabled HMRC to declare self-employed people as employees. But HMRC has viewed all self-employed people as tax dodgers. HMRC made such 'employee' opinions on a mass scale.
The trouble is that when the courts looked at HMRC's opinions, HMRC lost. HMRC's process was (and remains) dodgy. But, despite HMRC's dismal performance, the tax authority destroyed small business person's businesses. HMRC has a blood trail of bankrupted self-employed people, and even suicides, where HMRC has been proven wrong.
The self-employed drive growth
However, after the Global Financial Crisis of 2008, UK self-employed numbers grew from around 12 per cent of the workforce to about 15 per cent. Economists at the time reported that the UK's post-GFC economic growth came substantially from the rise in self-employment. Millions of 'little people being their own boss is a powerful economic growth generator. But HMRC viewed this growth as a threat to the exchequer.
CEST is a legal fantasy and the rules dumb
In 2017 HMRC shifted tactics. Instead of directly attacking self-employed people, additional new 'Off Payroll' rules required the engaging business to be responsible for deciding if a person was self-employed or an employee. The engaging companies were strong-armed into using HMRC's online decision tool (CEST) to make the assessment. However, CEST had no basis in statute and only reflected what HMRC wanted the laws on status to be so they could collect more tax. CEST was and is an HMRC legal fantasy.
At first, the rules applied only to the public sector. Naturally, no public servant will make an assessment that differs from what the HMRC says. HMRC collected more tax, but this was just a circling of money: Government departments giving money to another government department (HMRC) was just plain dumb. Then it emerged that the contractor ended up paying zero tax due to a structural flaw when HMRC enforced the rules in the public sector. Dumb and dumber still.
Private sector roll-out proliferated more tax-dodging
In 2021 HMRC applied the new Off-payroll rules to the private sector. This is where disaster struck (again). Third-party "umbrella" operators have evolved since 2017 and claimed they could manage the Off-payroll rules. The public sector, followed by the private sector, forced self-employed contractors to work through these third-party operators. But far too many of these operators ran their own tax-dodging schemes, stole from contractors, and operated outside the UK to avoid UK laws.
What a mess—and all the result of the UK tax authority (HMRC) making a botch of tax administration, with the UK government going along with it.
Sunak’s attack on the self-employed lost him the leadership
In August 2022, the London School of Economics reported that UK self-employed numbers were down by 500,000 and dropping. It said, "The economy is not going to recover until we start treating them (the self-employed people) better."
This message about economic reality was delivered shortly after Boris Johnson had resigned as PM, but it was already resonating throughout the UK. Rishi Sunak was Johnson's Chancellor. He introduced Off Payroll to the private sector in 2021. When Sunak made his pitch to become Conservative Party leader, he was hammered on social media for his trashing of the self-employed. Liz Truss promised to do something about IR35. Truss won the leadership.
Repeal a “massive embarrassment for HMRC”
What has surprised everyone is that the new Chancellor's announcement last week is the destruction of the Off-payroll policy. This is a massive embarrassment for HMRC but shows the extent to which the Truss government seeks a total reset. The new Chancellor, Kwasi Kwarteng, said the government would "turn a vicious cycle of stagnation into a virtuous cycle of growth." Dumping Off-payroll is a headline part of a substantial package of business encouragement reforms aimed primarily at easing regulatory complexity.
More can be done to help the self-employed
But from this start, more needs to be done. The Off-payroll dumping is a recognition that HMRC has acted unfairly and unjustly toward the UK's sell-employed millions. This HMRC behaviour is an economic growth suppressor and a political liability for any incumbent government. IR35 itself is flawed. Legislated fair tax administration laws are needed that give HMRC good tax collection powers but protect small business people from bullying HMRC. There are global models that strike this balance.
Ken Phillips is Executive Director of Self-Employed Australia. Ken has been a leader in self-employed rights advocacy in Australia and globally for more than 25 years. His work resulted in the Australian Independent Contractors Act (2006), sham contract prevention laws and Unfair Contract laws for self-employed people (2016). He has a strong focus on tax fairness. Ken has studied the IR35 issue since 2000. In September this year, he was in the UK workshopping with ContractorCalculator and others on securing rights for self-employed people.