IR35 private sector reforms: Coronavirus prompts calls for fairer deal for self-employed IT workers

The economic fallout from the Covid-19 coronavirus outbreak has “exposed the unfairness” of the government’s IR35 tax avoidance reforms, as self-employed IT workers face up to the prospect of being benched by clients without pay for an undefined period of time.

On 17 March 2020, the government announced a £350bn package of measures to support businesses suffering from a downturn in trade as a result of the coronavirus pandemic, but – at the time of writing – very little in the way of support for self-employed workers has been forthcoming.

Speaking to Computer Weekly, Dave Chaplin, CEO of tax consultancy ContractorCalculator, said the situation has led to contractors being “sent home” by clients, leaving them with no means of financially supporting themselves or their families.

“There are firms where the vast amount of software development is done by IT contractors. And those projects will just be put on hold, and [the contractors] will be out the door because if the money’s not coming in, then they can’t get paid. It’s going to be extremely bleak,” he said.

For salaried workers, though, the situation is different, in that they are entitled to sick pay if their ability to work is compromised by the virus, or any other illness, whereas contractors are not.

At the same time, the government’s £350bn business support package includes the provision of loans to business, so they can afford to retain staff and pay their wages should they be affected by a coronavirus-related downturn in trade.

“Employees get paid for making themselves available, but contractors don’t. They only get paid for work done. And if there’s no work to be done, they do not get paid,” he said.

What the pandemic has done is highlight the huge levels of inequality that exist in workforces across the country, and – in turn – the “unfairness” of the government’s IR35 off-payroll legislation, he added.

According to the government, the legislation is designed to clampdown on individuals deliberately misclassifying themselves as contractors to minimise their employment tax liabilities when they are performing the same work and duties as a permanent employee.

The government is tightening up the rules by absolving contractors from deciding for themselves if the work they do means they should be taxed in the same way as a salaried employees (inside IR35) or off-payroll workers (outside IR35) by handing responsibility for that to the companies that engage them.

This way of working has been in place in the public sector since April 2017, and the government was also planning to extend this way of working to medium-to-large firms in the private sector in April 2020, but that has now been postponed for 12 months due to the coronavirus outbreak.

However, Chaplin is of the view that the government should go a step further and scrap its plans to extend the IR35 changes to the private sector completely, because the coronavirus outbreak has shined a light on just how grossly unfair the legislation is.

The whole fairness argument is dead and buried – and it’s been shown for what it is, which is an incredibly unfair piece of legislation

This is especially given that anyone who receives an inside IR35 determination will be taxed in the same way as a permanent employee, but will not receive any of the same employment benefits, including sick pay. 

“The coronavirus is exposing the unfairness of the off-payroll legislation in the fact that people are classified as employees for tax purposes [but] don’t get rights,” he said.  

The government’s argument that it is only fair that two people doing the same job should taxed the same way falls apart, he added, when only one of them (the permanent employee) in that scenario is eligible to receive employee benefits.

“The whole fairness argument is dead and buried – and it’s been shown for what it is, which is an incredibly unfair piece of legislation,” Chaplin said.

Given the uncertainty over how long the coronavirus pandemic will last for, and how long-standing the economic fallout from it will be, Chaplin said he would be surprised if the government does decide to press ahead with extending the reforms to the private sector in April 2021 after all.

“Whilst HMRC has said, ‘This is a deferral, not a cancellation’, I would say that’s extremely hopeful, and would more than happily take bets that it will never go out in April 2021. In its current form, and in light of the unfairness the legislation opens up around zero rights employment, it completely shows the policy up as being cruel and unjust.”

For many private sector businesses, their priorities at the moment – and in the coming months – will be on staying afloat and recovering from whatever impact the coronavirus ends up having on their business. And preparing for the IR35 reforms is likely to be low on their list of priorities.

“Firms need to prepare, and start preparing [for these changes] at least six months before, and we’re not going to be through the coronavirus in six months. I just can’t see that happening,” he added.