Repealing IR35 reform will unlock the freelance future
It’s fair to say that it has caused some friction since it was unveiled, but chancellor Kwasi Kwarteng’s Mini-Budget 2022 also sought to remove a big point of friction in the freelance hiring process, with its vow to revoke IR35 reform, writes Shib Mathew (pictured), founder of freelance management system YunoJuno.
A historical, welcome move to right the wrongs of IR35
In fact, Mr Kwarteng used his Friday September 23rd statement to announce that the government will repeal the Off-Payroll Working reforms from April 6th 2023. These rules, known as ‘OPW’ or IR35 reform, were introduced in the public sector in 2017 and extended to the private sector in 2021. These reforms made most businesses engaging incorporated business individuals responsible for these individuals’ IR35 status and associated taxes.
Rolling back these reforms is massively welcome and will boost the UK’s freelancing community following first-hand evidence we’ve seen of the disruption to freelancer engagement -- and growth -- over the last 18 months caused by the two frameworks.
More consideration of freelancing was needed
It should be made clear that I am not against tough tax rules or reform to tax rules designed to make them more effective for HMRC. The billions of pounds that it costs the government to effectively keep some semblance of normality for large parts of the population during covid-19 has to be funded somehow. But IR35 reform’s biggest failing was that more consideration of it was needed by the government, and it wasn’t given. Officialdom should have more fully understood the freelance economy and its increasing role in the future of work before imposing the 2017 and 2021 rules.
The ways in which individuals are choosing to be employed in today’s labour market and the desire within more organisations to engage independent, skilled, niche professionals has dramatically changed in the last 20 years. Post-pandemic, the changing face of employment -- with distributed teams and hybrid working practices -- is accelerating.
Government added friction to a purposefully frictionless way to work
The implementation of the revised IR35 legislation in the public sector first and then the private sector afterwards added unnecessary friction to a labour market built on an agile, purposefully frictionless approach to work. To simply apply an employee-style test in tax legislation whereby the engager had to decide if workers were effectively employees -- and risk tax penalties for their organisation if they decided they were not akin to employees but got it wrong, was ill-considered. And it was pre-mature. The Public Accounts Committee, the National Audit Office and the House of Lords have all said as much. The fact that the framework was hurriedly imposed on such a large and thriving segment of the economy was a further, sad, significant blow.
From speaking to parties in the freelancer supply chain, I can tell you the consensus is that the IR35 reforms failed to truly understand all the complexities of the freelance industry. They also went directly against the enormous opportunity presented by the fastest-growing segment of the labour market by taking the decision of their status away from them. Furthermore, the additional burden put onto hiring organisations stymied their own work and growth, at a time when the entire economy desperately needed rocket-fuelled injections of talent wherever it could get it.
Headaches for hirers
Going freelance – be that as a contractor or a hirer – enables a completely different approach to traditional structures within an organisation, and to how work is done. If the coronavirus pandemic has revealed anything regarding the labour market, it is that agile workforces are gaining competitive advantage. My belief is that any system that facilitates such agile workforces has the potential to redefine the modern workplace.
As mentioned, the 2021 revisions to IR35 stipulated the transfer of responsibility – and, more importantly, the liability – from the contractor/freelancer to the client/end-hirer. The change had been introduced in the public sector in 2017. So the onus was put on both for-profit and taxpayer-funded organisations to determine the working practices for any engagement executable by freelancers, and to declare that, to continue on a commercial basis with incorporated freelancers, these workers were not ‘disguised employees’ (‘outside IR35’). Given the looming threat of HMRC penalties if they got that declaration wrong, this change simply put off many organisations from engaging limited company-operating freelancers altogether.
Onus returns to the freelancer
The promised repeal of IR35 reform by chancellor Kwarteng means that the pre 2017/2021 status landscape will return, in the shape of the Intermediaries legislation (2000). We can expect the checks around ‘disguised employment’ and related working practices to remain -- but the onus will go back onto the freelancer/worker to determine their own IR35 status. This may be the catalyst many organisations need to reassess their engagement of freelancers and if so, I wholeheartedly welcome this reversion.
However, freelancers need to make sure they are on top of their responsibilities, as there is a risk of them falling foul of HMRC.
Three IR35 tips for freelancers facing the April 6th 2023 return of IR35
My top tips for any freelancer who intends to operate via their own company post-April 6th 2023 (when the ‘old’ IR35 takes effect) is:
- understand your IR35 position/status; and
- prepare for your position/status to be enquired about and/or scrutinised
- know how you are going to protect yourself and your independent career (such as by undergoing an IR35 contract review with a status advisory).
While this trio is important and should not be overlooked, the bigger picture is that a huge hurdle in the freelance game has been lifted.
Finally, a freelance future...
That said, knowing where you stand now is key given that the OPW rules remain in force for almost another seven months. And knowing where you’ll stand after April 6th 2023 requires some real thought too, as investing some time on your incoming status will put you on the best footing for managing both the return of the original IR35 framework and what Mr Kwarteng hopefully has in mind with this historic repeal -- the commencement of a resurgence in professional freelancing in the UK.
4th October 2022