IR35 reforms: Chancellor slammed for dig at self-employed tax habits during coronavirus briefing

The chancellor, Rishi Sunak, has come under fire for using his address to the nation about supporting the self-employed through the Covid-19 coronavirus outbreak to restate the government’s commitment to ensuring that contractors pay the same tax as employees.

Sunak used the government press conference on Thursday 26 March to outline the package of financial measures being put in place to support self-employed people who have lost work or are struggling to make ends meet during the coronavirus pandemic.

The measures include a promise to pay self-employed people who earn up to £50,000 a year a maximum of £2,500 a month for at least the next three months, if their ability to earn an income has been compromised by the coronavirus.

These payments will be made possible through the provision of a taxable grant worth up to 80% of the average monthly profits these individuals have banked over the past three years, Sunak confirmed.

During the address, he described this package and the other the steps the government has taken in recent weeks to shore up the economy as “one of the most significant economic interventions at any point in the history of the British state” and “by any government, anywhere in the world.”

But, as far as the self-employed package of measures are concerned, the action being taken will have consequences, he added. “I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses,” he said.

These words have been taken by some as a veiled dig by the government at self-employed individuals who, it claims, are not paying a “fair amount of tax” when the work they do and how it is performed means they are essentially permanent employees in all but name.

This is a central tenet of the IR35 tax avoidance reforms, which the Treasury confirmed last week will not be extended to the private sector in April 2020 as planned, as a direct consequence of the coronavirus outbreak.

Instead, the changes – billed by the government as a clampdown on disguised employment – are now due to come into effect in April 2021, and will see medium-to-large private sector organisations assume responsibility for determining how the contractors they engage should be taxed.

Currently, it is down to the contractors to decide whether the work they do means they should be taxed in the same way as a permanent employee (inside IR35) or as an off-payroll worker (outside IR35), which may bring with it a reduction in their employment tax liabilities.  

When asked to expand on his comments during a post-address Q&A by ITV1 political editor Robert Peston, Sunak said it was a “broad point” he was trying to make, rather than a signifier of future tax policy, but that there is an “inconsistency in contributions between self-employed and employed” at the moment.

He added: “Obviously, the action taken today, which is very significant [in providing] tens of billions of pounds of support for those who are self employed, and treating them the same way as those who are employed, it does just throw into light that question of inconsistency.

“And whether that is fair to everybody going forward, especially… when we get through this and we are all chipping in together to right the ship afterwards, and making sure that everyone is doing that as well.”

The timing of the reference – during the UK government’s daily pandemic briefing – took some industry watchers by surprise, with Dave Chaplin, CEO of IR35 tax consultancy ContractorCalculator, describing it as “distasteful”.

“Once again, the government claims the self-employed are not paying a fair level of tax,” he told Computer Weekly. “The entire point of the recently delayed IR35 reform was due to secondary class 1 NICs [employer’s NI], which is a tax that corporations avoid paying when they hire contractors. Yet the chancellor used this forum to once again scapegoat contractors as paying less tax.

“The coronavirus schemes for employees and the self-employed are effectively a government handout – and nothing to do with employment status. To conflate the two and threaten the self-employed at a time when they are most vulnerable is rather distasteful.”

This view was echoed by Seb Maley, CEO of IR35 tax advisory firm Qdos Contractor, who said: “Like employees, these people pay their tax, contribute billions to the economy and are helping the UK through this crisis.”

Richard Harris, chief legal officer at global recruitment consultancy Robert Walters, described Sunak’s words as a “warning” and a “caution” to the self-employed.

“Rishi Sunak’s observation as to the fairness in the differential in tax between PAYE [pay as you earn] and the self-employed means he may well be looking for those who are being bailed out to pay the ferryman for a journey across the swirling waters,” said Harris.

As previously mentioned, plans to extend the IR35 rules to the private sector are now on hiatus, but there have been calls this week for the government to consider scrapping them completely, which is a view Harris shares.

“I would personally like to see a fundamental rethink around IR35 and what it is to be self-employed in the 2020s,” he said. “Those changes created a colossal burden on business and a lack of clarity for individuals. Surely, with Rishi’s dynamism, we can do better.”