Labour and IR35: What will a Labour Government mean for UK Contractors?

With Labour’s decisive victory in the UK general election on July 4th, the question arises: what does it mean for the UK’s independent contractors and freelancers? Here’s an analysis of what Labour’s victory could mean for contractors and freelancers in the UK.

A Glimpse into Labour’s Pledge

On Friday, May 24th, the UK Labour Party unveiled a comprehensive plan titled “A New Deal for Working People.” This pledge aims to overhaul employment rights, promising fairer treatment for workers across various sectors. However, there was no mention of IR35 in the document. Let’s look at what IR35 is and what a Labour government could mean for IR35.

Understanding IR35

Introduced in 2000 when Labour were in government, IR35 is designed to prevent tax avoidance by workers providing services to clients via an intermediary, such as a limited company, but who would otherwise be considered employees. Essentially, IR35 ensures these workers pay broadly the same tax and National Insurance contributions as employees. The rules distinguish between ‘inside IR35’ (deemed employees for tax purposes) and ‘outside IR35’ (genuine contractors operating as a business). However, it could be argued that IR35 did not negatively impact the contract market in the UK which grew exponentially.

IR35 Reform

In my opinion, under a Conservative government IR35 got significantly worse in April 2021 when the responsibility for determining IR35 status shifted to the end-client and fee payer, a move known as IR35 Reform. According to GOV.UK: “From 6 April 2021 all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply. If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.”

This shift led many large companies to blanket ban the use of outside IR35 contractors, significantly impacting freelancers. The Association of Independent Professionals and the Self-Employed (IPSE) reported that approximately 21% of freelancers were without work, with half attributing this directly to IR35.

A brief respite came on September 23rd, 2022, when Chancellor Kwasi Kwarteng announced a reversal of the IR35 reforms. However, new Chancellor Jeremy Hunt later rescinded this decision, frustrating many freelancers and contractors who saw a missed opportunity to simplify the system. At the time, I wrote that I felt Kwasi Kwarteng got it right but unfortunately was caught up in the ultimate failure of Liz Truss’ short reign.

Labour’s Pledge: Promises and Potential

Labour has been quiet on the topic of I35 with only Reform UK mentioning during the election campaign. However, Labour did release “A New Deal for Working People” includes several measures aimed at improving workers’ rights:

• Rights from Day One: Ensuring all workers, including freelancers, receive basic rights from the start of their employment.
• Ban on Zero-Hour Contracts: Eliminating precarious employment arrangements to promote job security.
• Right to Flexible Working: Allowing requests for flexible working from day one.
• Stronger Workers’ Rights: Empowering workers and trade unions with enhanced rights and bargaining power.

Implications for Freelancers and Contractors

The “New Deal for Working People” document outlines various pledges and reforms aimed at improving employment conditions in the UK. While the document mentions freelancers and contractors, it does not provide specific details about IR35 reforms. Here is my summary of the document:

• Single Status of Worker: Labour plans to move towards a single status of worker, transitioning to a simpler two-part framework for employment status. This framework would differentiate between workers and the genuinely self-employed. The goal is to simplify the current three-tier system (employees, self-employed, and workers) to provide clarity and avoid exploitation. Labour will consult in detail on how this simpler framework can properly capture the breadth of employment relationships in the UK and adapt to changing forms of employment.
• Rights and Protections for the Self-Employed: Labour recognises the significant contribution of the self-employed to the UK economy (something the current government have been criticised for not recognising) and pledges to support and champion them. This includes:
  • The right to a written contract, benefiting freelancers by ensuring they have formal agreements.
  • Action to tackle late payments, which is a common issue for freelancers and small businesses.
  • Extending health and safety and blacklisting protections to self-employed workers.
• Ending Exploitative Practices: Labour plans to ban exploitative zero-hour contracts and ensure all jobs provide a baseline level of security and predictability. This would benefit freelancers by creating more stable and predictable work arrangements.
• Basic Day One Rights: Labour will introduce basic individual rights from day one for all workers, including freelancers. This includes protection against unfair dismissal, parental leave, and sick pay. This could blur the lines between self-employment and traditional employment but aims to provide more security for freelancers.
• Flexible Working: Labour will make flexible working a default right from day one for all workers, except where it is not reasonably feasible. 

Conclusion

In summary, Labour’s pledge for a single worker status should not be applied in any way to the huge freelance workforce we have in the UK. I urge the new Labour government to repeal IR35 immediately, helping more freelancers and contractors get back to work and driving economic growth.

However, this is highly unlikely and I think the current status quo will continue for some time. Labour has a big to-do list now and it is hard to see how IR35 gets to the top of the list. Given the likelihood that the current IR35 legislation will remain unchanged, it is important for both clients and contractors to take proactive steps to ensure compliance and maintain productive working relationships with each other. 

Recommendations for Clients

1. Conduct Regular IR35 Assessments:
   • Regularly review and assess the IR35 status of contractors using reliable tools and methods. We work with our partners at Worksome and Qdos to ensure compliance and protection.
2. Provide Clear and Accurate Contracts:
   • Ensure that contracts with contractors are clear and reflect the genuine nature of the engagement. Avoid terms that resemble employment contracts. Include provisions that highlight the contractor’s autonomy and right to provide a substitute. Moving to outcome based contracts with payments based on milestones is a great way to go.
3. Do not blanket ban Outside IR35:
   • Provide training for hiring managers and relevant staff on IR35 regulations and compliance. Ensure that everyone involved in the contracting process understands the importance of correctly determining employment status and adheres to best practices. Just banning Outside IR35 is short sided.

Recommendations for Contractors and Freelancers

1. Seek Professional Advice:
   • Consult with a tax advisor or legal expert specialising in IR35 to ensure you fully understand your status and obligations. Professional guidance can help you navigate complex scenarios and avoid potential issues with HMRC.
2. Operate as a Genuine Business:
   • Maintain business-like practices, such as having multiple clients, investing in marketing, managing your own equipment, and maintaining business insurance. These actions reinforce your status as a genuine independent contractor.
3. Negotiate Contract Terms:
   • Work with clients to negotiate contract terms that reflect your independence. Ensure contracts include clauses that emphasise your control over how the work is done, your right to provide a substitute, and other factors that demonstrate your self-employed status. Outcome based contracts are recommended with payment based on milestones. 

By following these recommendations, both clients and contractors can better manage their IR35 obligations and maintain mutually beneficial working relationships. While the current IR35 regulations present challenges, proactive measures can help mitigate risks and support the continued success of the freelance sector.