IR35 a ‘threat’ to UK’s bid to become science and tech superpower, contracting authority warns

The government’s controversial IR35 tax avoidance legislation threatens to derail the UK’s bid to become a science and technology superpower, contracting authority Qdos has warned.

As previously reported by Computer Weekly, the government announced during the March 2023 Spring Statement plans to invest £1bn in developing next-generation supercomputing and artificial intelligence (AI) research, as well as a further £2.5bn to be spent on honing the UK’s quantum computing strategy.

However, Qdos CEO Seb Maley claims this investment could be “money down the drain” if the flaws in HM Revenue & Custom’s (HMRC) IR35 legislation are not fixed.

The legislation, introduced at the turn of the millennium to clamp down on disguised employment in the contracting sector, has been subject to reforms in recent years that have seen responsibility for determining how contractors should be taxed shift onto the organisations that engage them.

Before the reforms came into force (in the public and private sector in April 2017 and April 2021, respectively) contractors were permitted to decide for themselves if the work they did and how it was performed meant they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35).   

According to HMRC, this system of self-declaration was subject to abuse by some contractors, who deliberately mis-classified their engagements as outside IR35 to artificially minimise the amount of employment tax they have to pay.

However, shifting responsibility for determining how contractors should be taxed onto end-hirers has resulted in reports of some organisations seeking to side-step the additional administrative burden this has placed on them by introducing hiring bans that prohibit the use of contractors.

Other organisations, meanwhile, are known to have – for similar reasons – made blanket determinations that have resulted in all of their contractors being classified as inside IR35, despite evidence to suggest they should be treated as outside IR35.

An inside IR35 determination means contractors should be treated as employees for tax purposes, but they are not eligible to receive employment benefits such as paid sick leave or holiday entitlement, leading to concerns the legislation is fuelling the growth of a “zero-rights employee workforce” in the UK.

“The IR35 legislation remains fundamentally flawed,” said Maley. “IR35 reform has resulted in genuinely self-employed contractors being forced into zero rights employment, while HMRC’s very own tool for assessing IR35 status is hopeless. 

“What’s more, HMRC double-taxes IR35, which means businesses are overtaxed if they are found to be non-compliant,” he said. “Rather than encouraging firms to engage contractors, it does the complete opposite.”

For these reasons, Maley is of the view that the government needs to go back to the drawing board and rethink the IR35 legislation, which – for a short while last year – was set to be repealed by the UK government until it U-turned on that decision weeks later.

As previously documented by Computer Weekly, various government departments have found themselves on the receiving end of sizeable penalties for failing to comply with the IR35 legislation correctly.

“If organisations, including government departments, aren’t in a position to manage these rules properly – something which would be made easier if the legislation was actually fit for purpose – they lose access to highly skilled, flexible workers, who hold the key to delivering key projects,” he said.