Labour’s Pledge: A New Deal for Freelancers and IR35 – Independence Day for Independent Contractors?

As the UK gears up for a general election on the 4th of July, coincidentally aligning with Independence Day in the USA, the question arises: will it be a happy Independence Day for the UK’s independent contractors and freelancers if Labour wins? With Labour widely expected to win I have written a short piece on what victory could mean for freelancing, particularly concerning the contentious IR35 legislation.

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. For freelancers and contractors, the plan is especially pertinent due to its potential impact on IR35, a set of tax laws that have long been a thorn in the side of the freelance community.

Understanding IR35

Introduced in 2000, 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).

IR35 Reform

In April 2021, 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 However, new Chancellor Jeremy Hunt later rescinded this decision, frustrating many freelancers and contractors who saw a missed opportunity to simplify the system.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 that 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’s “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

I have read through the  “New Deal for Working People” document which 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 the document:

Review and Reform of IR35

The document hints at a possible review and reform of IR35. Labour acknowledges the complexity and administrative burden of IR35 for freelancers and small businesses. The aim would be to provide clearer guidance to distinguish between genuine contractors and disguised employees.

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 this) 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. This is intended to benefit freelancers by promoting a healthier work-life balance and accommodating various working arrangements.

In summary, Labour’s pledge aims to simplify employment classifications and extend rights and protections to freelancers and self-employed workers. While there is an indication of a review and reform of IR35, specific details on how IR35 will be addressed are not provided. The focus is on creating a fairer, more transparent system that balances the needs of businesses and workers.

I firmly believe that IR35 simplification is crucial and single worker status could be a step in the right direction. In the short term, the IR35 reform should be repealed to make it easier for medium and large companies to hire freelancers and contractors as we cannot wait. Simplifying these regulations would not only benefit freelancers by reducing the administrative burden but also encourage businesses to engage more freelance talent, this would boost the economy significantly as well as help deliver on the UK being a hub for innovation.

Conclusion

While Labour’s pledge aims to provide greater protection and rights for all workers, including freelancers, it’s crucial to consider the potential downsides. The introduction of a single worker status and the extension of employment rights to freelancers could blur the lines between self-employment and traditional employment, potentially eroding the unique advantages of freelancing. This could undermine the flexibility, autonomy, and tax efficiencies that attract many to freelance work in the first place.

Furthermore, the increased costs and administrative burdens on businesses might discourage them from hiring freelancers, leading to fewer freelance opportunities. Companies could opt for more traditional employment models to avoid the complexities and financial implications of hiring under the new framework. In this light, Labour’s well-intentioned reforms could actually slow down the freelance sector making it harder for freelancers to thrive in a changing economic landscape.

Whoever is in government on the 4th July, to make it a happy Independence Day for Independent Contractors I urge you to repeal IR35 immediately to help more freelancers and contractors get back to work.