For the last 23 years, successive Governments have allowed the Treasury and HMRC to design and launch legislative “tax cluster bombs” to take out a perceived threat to the Exchequer—namely, the self-employed. This legislative arsenal sneaked into Parliament, was labelled with questionable impact statements, and was waved through by MPs under the rhetoric of fairness. Yet, all it does is shackle those wanting to be their own boss and impede UK growth.
So says Dave Chaplin, founder UK website ContractorCalculator, who has been championing the self-employed for over two decades.
The chosen method of these self-employed bombers is a device called “deeming provisions”, where HMRC gain powers to override the longstanding principle of the freedom to contract as well as the ability to say to a person, “Hey, you aren’t what you say you are, you are an employee, not a contractor – give me your money.”
1999 - The Intermediaries Legislation “bomb”
The first siren sounded in 1999 when the then Inland Revenue (now HMRC) signalled its intention, in note number 35, to crack down on “deemed employment,” colloquially referred to as “IR35”. The first tax bombing raid began in April 2000 as HMRC launched its first missile in the two-decade story of oppressive taxation—the Intermediaries Legislation (Chapter 8 of the Income Taxes Earnings and Pensions Act 2003).
In a nutshell, when firms hire contractors, they don’t have to pay employers’ National Insurance of 13.8%, nor do they have to give them rights – because they are not employees. This unimpeded access to on-demand flexible talent is the growth engine of the UK economy, but the Treasury views them as tax avoiders. The Intermediaries Legislation targeted the contractors’ companies, making contractors responsible for determining their own “employment status for tax purposes” and making them liable for unpaid tax.
Despite seeking to carpet bomb the self-employed by opening thousands of enquiries in the early noughties, these tax bombs were largely ineffective. By 2011, after losing five successive cases in a row at the tax tribunal and failing to win more than half of all cases, HMRC appeared to abandon their bombing runs.
The Off-payroll “reform” weapon
But, desperate for money, in 2016, the tax bombers began designing a new deadlier weapon, labelled “Off-payroll working” (Chapter 10 of ITEPA 2003), for which they used the public sector as a test site.
This weapon was perhaps designed with the cold war in mind, never to be used, but posed a vicious threat whereby any business seeking to defend itself against an attack would be annihilated. This time, the onus was on the firms to determine the contractor’s tax status and carry the tax burden. But the bomb was designed so that if the firm got it wrong, the amount of tax owed was often four times the perceived tax loss. With many contractors on their books and given the subjectivity associated with determining their tax status, many firms decided to eject them all, close the bunker’s doors and not let them in.
This latest attack was all launched under the banner of “fairness” – tax dictators will say anything, won’t they? In essence, without dropping a single bomb, the threat made businesses ban the highly talented, on-demand, flexible workforce, leaving no choice but to put them on the payroll. The actual position in law didn’t matter to firms, nor did HMRC seem to care as long as they got the money. People fled the public sector and carried on being their own bosses in the private sector.
Despite faults the private sector gets attacked
Despite the public sector getting hit with £263m of tax bills by HMRC, HMRC pushed the Government to unleash its new weapon on the private sector in April 2021. Not surprisingly, it had the same effect. Hundreds of thousands of genuinely self-employed people had their livelihoods damaged as firms shut their bunker doors. Some victims survived, leveraging the new Work-From-Anywhere revolution by refusing to engage with UK companies. And some UK companies survived by pushing work to offshore companies and workers.
HMRC stood back, claiming victory: “Ah, I love the smell of charred disguised employees in the morning”, whilst they surveyed a landscape peppered with genuinely self-employed people who had become collateral damage in the war, without a single private sector tax investigation yet to be launched.
Kwasi tries to disarm but fails
But then, hope! On Friday, 23 September 2022, after 18 months of the horrendous second war on contracting, the then newly appointed Chancellor, Kwasi Kwarteng, announced plans to repeal the Off-payroll working rules from April 2023. The Conservative Party were decommissioning the dreadful weapons of mass self-employment destruction as part of its pro-growth agenda.
Over the next 24 days, businesses and the self-employed rejoiced whilst nervously waiting for the next Finance Bill, which would cement in statute the scrapping of the arsenal called Off-payroll.
But, alas, after political chaos in the UK, on 17 October 2022, a new Chancellor announced that the weapons would remain. And, since then, the public sector tax bill has risen to £300m, with the latest government department, the UK Research and Innovation (UKRI), owing HMRC £36m in back-dated tax after a review of its IR35 compliance procedures uncovered historical errors in how it classified the employment status of some of its contractors.
Fairness to IR35 rules of war?
Fortunately, despite not cancelling the damaging legislation, a glimmer of light has appeared as the Parliamentary lawmakers have intervened by signalling a decommissioning of the mothership of all stealth tax bombing raids hidden within the legislation. The massive threat is the legislative flaw which makes hirers pick up the tax bill for themselves and the contractor, whilst the contractor pays nothing – meaning, in many cases, the hirer effectively pays a 400% tax penalty for making an honest mistake.
With the tax threat downgraded from “business destroying” to “business annoying”, we will hopefully see growing firms reopening their bunker doors and leveraging our highly valuable on-demand talent again, all helping to support much-needed UK growth.
Until Finance Bill 2024 is passed, however, we continue with horrendously flawed tax laws that arguably do not increase revenue, drive businesses and people offshore, and open the door to dodgy tax schemes that threaten the Exchequer more than the self-employed ever did.
Ballot box bludgeon?
Nonetheless, while the war continues, the self-employed prepare themselves with voting papers. The incumbent Government will face a battle because the people who want to keep their right to be their own boss are fighting back.
An abridged version of this article appeared in the Yorkshire post on 19th July 2023.