Government slammed for slow response to IR35-related consultation on zero-rights employees

The UK government has said it has no plans to make changes that would see IT contractors working inside IR35 granted access to the same workplace benefits as full-time employees.

The admission features in the government’s response to a three-month consultation that sought to examine whether the recommendations made in the 2017 Taylor review of modern work practices would make it easier for businesses to make employment status determinations.

The consultation ran from February to June 2018 and garnered 162 responses, but the government’s response to it has taken until 26 July 2022 to see the light of day.

Among Taylor’s recommendations was a call for the government to take action to ensure the laws on tax and employment are more closely aligned to ensure that contractors who pay the same tax as permanent employees receive the same workplace benefits.

It is an argument that has won the support of cross-party MPs and various contracting stakeholders, particularly in the light of changes the government has introduced in recent years to alter the way the IR35 tax avoidance legislation works in both the public and private sectors.

These changes have seen contractors cede responsibility to the organisations that engage them for determining whether the work they do and how it is performed means they should be taxed in the same way as permanent employees (known as working inside IR35) or off-payroll workers (outside IR35).

The changes, which have applied to medium to large organisations in the private sector since April 2021, have proved controversial since they were rolled out to the public sector in April 2017 because of the additional administrative burden they place on end-hirers.

Some organisations are known to have responded to this by declaring all of the contractors on their books to be working inside IR35, which means they pay the same employment taxes and national insurance contributions (NICs) as permanent employees, but are not entitled to the same employee benefits, such as paid holiday, sick leave or pension payments.

This has led to accusations that the IR35 rules are being used and abused by private and public sector organisations to cut costs by enabling them to hire contractors to effectively work as “zero-rights employees”.

This, in turn, has led to repeated calls for the government to tweak the IR35 rules so that contractors who are paying the same tax as permanent employees receive the same workplace benefits.  

However, in its published response to the consultations, the government said it has no plans to make any such changes to the way employment status and tax laws work together.

“The government recognises that while the employment status frameworks for rights and tax serve different purposes, there could be some benefits to greater alignment between the two systems,” the response stated.

It went on to say that the consultation’s participants put forward a range of views on how this could be achieved, but there was a lack of consensus, and alignment “would be complex” to achieve and would “need to be considered carefully” before being embarked upon.

“Noting the lack of consensus around alignment, the ongoing economic recovery from the pandemic, and the wider economic context, the government has decided that now is not the right time to bring forward proposals for alignment between the two frameworks,” it concluded.

“We will, however, work closely with stakeholders to explore longer-term options to improve the employment status system for tax to ensure it is as clear as possible and usable for all parties.”

The government’s response to the matter makes for “very disappointing reading”, said Dave Chaplin, CEO of contractor tax compliance firm IR35 Shield.

“After spending over four years since the consultation closed on 1 June 2018, the government has carefully considered all 162 responses and published a 32-page document which effectively says ‘we have decided to do nothing,’,” he said.

“On the final page, the report states: ‘Now is not the right time to overhaul the employment status frameworks for rights and for tax.’

“Employment status is complex and, as previous governments have done, this topic is being filed into the ‘too difficult to deal with’ drawer.”

Seb Maley, CEO of IR35 compliance and insurance consultancy Qdos, was similarly shocked by the government’s take on the consultation.

“This response is astonishing, even for this government,” he said. “IR35 reform has seen tens of thousands of genuinely self-employed contractors left with no choice but to work inside IR35, where they are taxed as employees and can pay anything up to 30% more in tax. Yet still these workers will not be granted employment rights in exchange.

“The fact that it has taken more than four years for the government to respond to this consultation is another slap in the face for contractors. Sadly, it shows just how far down the list of priorities contractors are for this government, which has already burdened independent workers with a raft of tax hikes and IR35 reform.”

Maley added: “Refusing to abolish what is known as zero-rights employment is unjust, illogical and a huge oversight. In the race to become the next prime minister, the candidates would be wise to take into account the damage that this ill-thought-out policy is doing.”