The Conservatives have committed to replacing IR35 with a new system if they return to government, with Shadow Chancellor Andrew Griffith saying the existing rules have “badly let down” self-employed workers.
Griffith made the announcement on 17 September during his first major speech since becoming Shadow Chancellor, delivered at Capital City College Group in Tottenham, north London.
Speaking about the impact of the rules, Griffith said: “Then there’s IR35, a regime which crushed the dreams of so many self-employed people to be able to work for themselves and regulate their own affairs. Freedom, responsibility, hard work, these are Conservative values. And yet I know that many felt badly let down by IR35 policies.”
He then made a specific commitment: “I’m committing today that the next Conservative government will replace IR35, not reform it, not review it, but replace it with a new system that respects the right of the self-employed to choose their status and only prevents actual abuse.”
Griffith has also commissioned a taskforce to examine how the wider tax compliance system could be changed to reduce the burden on small businesses. It will be led by Conservative peer Lord Mackinlay of Richborough, the former South Thanet MP, and Robert Colvile, outgoing director of the Centre for Policy Studies.
The case for replacing IR35
For growing UK firms, access to flexible expertise can be essential. But firms cannot afford uncertain tax liabilities building up on their balance sheets. IR35 and the off-payroll rules can create that uncertainty, with consequences for hiring decisions and, potentially, due diligence during mergers and acquisitions.
Calls to scrap or repeal IR35 entirely have existed for years. The difficulty is that the legislation was introduced to counter tax avoidance involving workers supplying their services through intermediaries. Any replacement therefore has to address both flexibility and the Exchequer’s concern about potential widespread tax avoidance.
Genuine contractors may rarely encounter the types of arrangements that originally drove the legislation, but they cannot be ignored. A replacement would still need mechanisms capable of preventing businesses from simply moving workers off payroll to reduce employment taxes. That makes outright repeal difficult unless another system deals with those risks.
The IR35 challenge ahead, what could replacement look like?
Dave Chaplin, CEO of IR35 Shield, says certainty should be the priority.
“We need to remove the uncertainty that many firms are unable to cater for, due to their zero risk tax policies. It’s why there are damaging blanket bans.”
Chaplin argues that one option would be to narrow the tax difference between employment and limited-company working: “The simplest measure, which we are not far from, is to reduce the differential in taxes generated by workers using limited companies and those on payroll. The current difference is circa 10-15%, much less than it was when IR35 was originally conceived.
“HMRC have claimed a third of contractors should be ‘Inside IR35’. If we simply introduced a 5% surcharge for intermediaries working via recruitment agencies, that would go a long way to shoring up the tax differential and providing simplicity and certainty.”
Chaplin says any new regime would also need to tackle arrangements designed to circumvent giving workers rights: “Historically, much of the avoidance was driven by firms and agencies who made using a limited company a condition of accepting work. We will need provisions to prevent false self-employment.”
Could IR35 be fixed instead?
Replacement is not the only possible route. Changes to the existing legislation could potentially remove some of the uncertainty while retaining its underlying anti-avoidance purpose.
Chaplin says: “I’ve identified nine technical fixes to the statute that could improve matters for all parties, but currently there is no political will by the Labour Party to engage on improvements. They are focused on rights, and not tax.”
Chaplin’s preferred longer-term approach would go further: “We’ve got five chapters of legislation covering contingent workers, all designed to prevent tax avoidance, which is intertwined and self-reinforcing. Repealing only one part of that isn’t realistic. Replacing all five chapters with a coherent working replacement is the answer.”