New prime minister Liz Truss urged to press on with IR35 and loan charge policy reviews

UK prime minister Liz Truss is being reminded of her pre-election promise to review the IR35 tax avoidance reforms and address what she previously called the “very poor” handling of the government’s controversial loan charge policy.

During Truss’s Conservative leadership campaign, which culminated in her becoming prime minister today (6 September), she pledged to review the IR35 tax avoidance rules, claiming that they were forcing genuinely self-employed people to pay too much tax.

The pledge was greeted with a fair degree of scepticism by contracting market stakeholders, who said that previous reviews of the rules had done little to address the problems and impacts caused by IR35.

Now Truss is in power, many of these same stakeholders are calling for her to make good on her pledge, while also restating their demands that her review must deliver “meaningful change”.

Among them is Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), who said his organisation is “looking forward” to working with Truss and her cabinet on her promised review of the IR35 rules.

“During the leadership race, Truss talked about ‘tackling orthodox Treasury thinking’,” he said. “If this review is to deliver meaningful change – which previous reviews haven’t – she will need to do exactly that: challenge the thinking that has led to this wretched legislation being enacted. If she makes real progress on this issue, she will achieve something that the previous three Conservative prime ministers couldn’t – enabling one of the most dynamic and innovative parts of the UK economy to thrive.”

How the IR35 rules work in the public and private sectors has undergone reforms in recent years, with the government introducing changes that meant contractors were no longer allowed to decide for themselves how they should be taxed, based on the work they do and how it is performed.

Instead, responsibility for making those decisions has shifted onto the public and private sector organisations that engage contractors, which are instructed by HM Revenue & Customs (HMRC) to use “reasonable care” when determining whether a contractor’s engagement should fall in or out of scope of the IR35 rules.

An inside-IR35 determination means contractors are considered to be employees for tax purposes, meaning they must pay the same tax as a permanent employee would. This means they are liable to make pay-as-you-earn (PAYE) and national insurance contributions (NICs), whereas an outside-IR35 determination means the contractor is taxed as an off-payroll worker.

One of the major and recurring criticisms of the rules is that although inside-IR35 contractors are taxed the same way as employees, they are not entitled to receive the same workplace benefits, such as paid sick leave or holiday.

As a result, concerns have been raised by MPs and campaign groups that this is contributing to a rise in the number of zero-rights employees, while anecdotal accounts suggest the legislation has also contributed to a “brain drain” of IT contracting talent out of the UK.

Seb Maley, CEO of contracting authority Qdos, said a thorough and fair review of the IR35 rules would go a long way to helping Truss and the Conservative Party win back the support of the contracting community.

“For far too long, freelancers, contractors and self-employed workers have been overlooked by the government and hit with short-sighted tax reforms and hikes that threaten this way of working,” said Maley.  

“But to seize this opportunity, the new prime minister must deliver on her promises. This starts with IR35. Ms Truss has said she will review the IR35 rules, which are flawed and create big problems not just for contractors, but also for the businesses engaging them.”

He added: “An independent review of IR35 that results in change must be prioritised – that is if the new prime minister genuinely wants to unlock the full potential of the flexible workforce.”

Truss also reiterated her commitment to conducting a review of the IR35 rules during a meeting hosted by the Croydon branch of the Conservative Party on Thursday 18 August, when she was quizzed about lending support for another independent review of the loan charge policy, which has resulted in tens of thousands of contractors receiving life-changing tax bills.

The loan charge policy, introduced in the 2017 Budget, is geared towards recouping the tax that HMRC claims contractors avoided paying by opting to have part of their salary paid to them in the form of non-taxable loans when working on assignments between December 2010 and 5 April 2019.

Loan-based remuneration schemes are known to have proliferated in the wake of the IR35 reforms being introduced at the turn of the millennium, with setups commonly marketed through non-compliant umbrella companies as an HMRC-approved means for contractors to bolster their take-home pay by artificially minimising their employment tax liabilities.

Thousands of IT contractors who took part in these schemes in the nine-year period to 5 April 2019 have since been landed with six-figure tax bills from HMRC, reportedly resulting in mass bankruptcies and contributing to at least nine suicides.

In response to the request for a review of the policy, Truss said: “The way the whole situation has been handled has been very poor in my view and we’ll look at what we can do on that specific issue and we’ll also make sure that, as part of our tax review, we’re looking at IR35 and the impact that has had because again, the people who are self-employed do not get the same benefits as people who are on pay-as-you-earn, so we should be doing what we can to help those people.”

Steve Packham, spokesperson for the Loan Charge Action Group, welcomed Truss’s acknowledgment of how difficult the policy has made life for those in its scope.

“She is right to be appalled at the nine suicides and also quite correct that the handling of the whole issue by HMRC and the Treasury has been very poor,” he said. “It’s time for a proper independent review of the whole thing and, most importantly, for a fair resolution to end the nightmare for thousands of families.

“We urge Conservative MPs to back the loan charge pledge and to call on the prime minister to review and resolve the loan charge scandal before more lives are lost.”