IR35 was introduced in 2000 by Dawn Primillo and Gordon Brown, designed to stop unfair off-payroll tax avoidance; for example media presenters paying themselves a minimum salary of say £12,000 a year then drawing down dividends and paying 19% corporation tax on the hundreds of thousands (or millions) they are paid.
However this tax catches honest freelancers and the self-employed, who work hard, are entrepreneurial and take measured risk in contracting. These people do not benefit from job security, paid holidays, sick pay, HR protection or other benefits of being employed, such as subsidised health insurance, group discounts and of course furlough payments.
IR35 forces companies to have contractors paid through PAYE which means they have to pay normal employment tax of employees (fair enough), but also Employers and Employees National Insurance contributions (being 11% and 12% respectively) and VAT @ 20%.
Companies refuse to assess genuine contractors correctly and make blanket decisions to push all contractors onto PAYE, but with no associated employee benefits.
HSBC and Nationwide Building Society are two large firms already doing this. HSBC have also off-shored large transformation projects, taking work outside of the country to avoid these rules.
Other companies are using services outside of the U.K. to provide contingency staff to replace contractors, in order to avoid getting caught up in these rules.
Infosys and Wipro are such examples. Staff from India are brought in to replace contractors; this can’t be beneficial to UK Plc or HMRC tax receipts.
Self-employed entrepreneurs who drive innovation and create jobs are paying 59.8% tax on their total earnings. In other words they work Monday, Tuesday and Wednesday without earning a penny. They only get paid for working on Thursday and Friday. How is this Conservatism?
According to new research from the Association of Independent Professionals and the Self-Employed (IPSE) IR35 changes appear to be hindering confidence in the self-employment sector.
Andy Chamberlain, a Director of Policy at IPSE, has called upon the Government to make changes.
"After a dark year in which [freelancers] were disproportionately hit by the financial impact of the pandemic, freelancers are again seeing cause to hope. Amid the optimism, however, there are also lingering causes for concern. Above all, the recent changes to IR35 are clearly damaging freelancers’ confidence in the future of their businesses – not unreasonably as they see the chaos now running through the contractor hiring market.”
“In fact, this is the first time since IPSE’s Confidence Index began in 2014 that freelancers have had less confidence in their businesses than in the economy.”
“Historically, the freelance sector has always been a key driver of economic recovery and it is clearly raring to go. At the same time, however, the IR35 tax change is a blight on freelancers that is undermining them at a crucial and otherwise optimistic time. We urge the Government to step in, clear up the chaos left after IR35 and launch a full review and reform of self-employed taxation. It must ensure freelancers have the confidence in their way of working to take up their vital place in our workforce and drive the UK’s economic recovery.”
Everything possible must be done to encourage them. Government is urged to review this change at the earliest opportunity to sustain a strong recovery. ”Do that, and economic activity will follow as sure as night follows day.”