The Case for Repealing IR35

Hiring freezes, layoffs and talent shortages (many caused by Brexit) are in the headlines almost daily so far in 2024. This is leading to an increase in demand for contingent talent and more companies are outsourcing outwith the UK to solve these challenges. It is time to ensure that the Uk simplifies how to hire contingent workers before it is too late.

The Association of Independent Professionals, IPSE, shared some insightful data in their last report:

• There are now over 1.9 million freelancers in the UK

• The freelance workforce contributes an estimated £278bn a year to the UK economy.

• Regionally, London, Scotland and Northern Ireland have seen increases in their solo self-employed population since 2021.

The freelance workforce can no longer be overlooked as a source of economic growth. One of the biggest blockers to freelance workers is the changes to IR35. Let’s have a look at this in more detail

What is IR35?

IR35, also known as the off-payroll working rules, was introduced in the UK to combat tax avoidance by contractors and freelancers who work similarly to employees but through an intermediary, such as a limited company. These rules ensure that contractors pay roughly the same tax and National Insurance contributions as employees. 

Contractor Calculator uses the following description:

IR35 is a word used to describe two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

In its simplest form IR35 makes a lot of sense and worked relatively well for years and years. Until April 2021.

IR35 Reform and Repeal (and back again)

In April 2021, the liability for determining IR35 status fell onto the end-client and fee payer for the first time, this was called IR35 reform. Below is short description on GOV.UK website:

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 led to large companies deciding to blanket ban the use of outside IR35 contractors. This has eased over the last two years but has reduced the amount of contract demand in the UK. 

However, on Friday 23rd September 2022, then Chancellor Kwasi Kwarteng announced that IR35 reforms were to be reversed. This was universally welcomed at the time. Briefly this meant that determining IR35 status fell back to the contractor and large enterprises rejoiced.

A few weeks later, new Chancellor Jeremy Hunt then reversed the proposed IR35 repeal. Confused? You should be. These changes in such a short period of time created so much uncertainty for freelancers.

With a budget coming in March 2024 and a general election most likely in late 2024 now is the time to repeal IR35. Below I state my case for IR35 repeal.

The Context: A Looming Recession

As reported by BBC News on 22nd December, the UK faces a potential recession. A crucial lever for growth during such economic uncertainties is the freelance economy. Therefore, it’s critical to facilitate the hiring of contingent talent by companies.

Reasons for Repealing IR35

Simply put, the short term reign of Liz Truss got many things wrong but it did get right repealing IR35. It is critical that IR35 is repealed in the next budget. Here are my six reasons why this should happen

• Enhancing Business Flexibility and Growth: In the UK, businesses need agility more than ever. Scrapping IR35 would offer this much-needed flexibility. This change is vital, especially as the Federation of Small Businesses reports that SMEs constitute 99.9% of the business population in the UK. Easing the engagement of freelancers would support these businesses in times when operational budgets are under strain.
• Boosting Freelancer Employment: In the UK, where contractors and freelancers form a significant part of the workforce, the impact of economic downturns is profound. The Office for National Statistics notes that the self-employed sector makes up around 15% of the UK workforce. Repealing IR35 would provide a lifeline to these professionals and potentially create new job opportunities, offering a fallback for those displaced from permanent roles.
• Reducing Administrative Burden: The complexity of IR35 compliance poses a significant challenge, particularly to small and medium-sized enterprises, which are the backbone of the UK economy. Simplifying these regulations would allow businesses to concentrate on crucial activities like survival and growth, rather than being bogged down by bureaucratic hurdles.
• Fostering Innovation and Entrepreneurship: Freelance work is a key driver of innovation and entrepreneurial spirit, both essential for economic recovery and growth. Eliminating IR35 would cultivate a more favourable environment for these creative and enterprising activities, an essential factor during times of economic challenge. 
• Contributing to GDP Growth: Repealing IR35 would align with the UK’s goal of becoming a global hub for talent and business-friendly practices. A report by Tech Nation highlights the UK’s tech sector’s rapid growth, but there’s a risk of losing this momentum to overseas markets with more relaxed contracting laws if IR35 remains. 
• Retaining Gen Z Talent: The preference for freelancing among Gen Z is notable, with many in this demographic looking beyond UK shores due to the restrictive nature of IR35. Data from the Office for National Statistics show a growing trend of self-employment among younger workers. Repealing IR35 would be a strategic move to keep this vibrant talent pool engaged and contributing to the UK economy.

A Call to Action

In light of these points, it’s time for a pragmatic approach. Jeremy Hunt and policymakers should consider the repeal of IR35 in the March 2024 budget to boost the economy, support innovation, and enhance the freelance economy’s potential in the UK. We can no longer think that the freelance economy in the UK is a bunch of tax avoiders and embrace this as a key economic driver.