Delaying IR35 reforms is nothing but a short term solution

(Image credit: Shutterstock / Natee Meepian)

Just a few weeks ago, the government made a surprising u-turn of sorts with the announcement that planned reforms to private sector IR35 (or off-payroll legislation) would be delayed until 2021 due to the ongoing coronavirus pandemic. 

As part of a wider package of measures brought in by Chancellor Rishi Sunak to protect businesses from the impact of Covid-19, the announcement was meant to bring some relief to UK freelancers and contractors. By delaying the reforms - which were intended to bring the majority of contractors working through a personal service company (PSC) into income tax and national insurance contributions for the first time from April 2020 - the government would enable businesses to be better-prepared to manage the changes. 

At first glance it certainly appears to be positive news for contractors and independent workers; many of whom will have been spared from managing a potential double whammy of challenges.  But it is in no way a long term solution.  In this article, I will examine the sentiment behind the IR35 reforms and discuss the impact and opportunity that could emerge from the government's decision to delay them.

It has taken a pandemic to be heard

Many contractors and accountants have been warning for months that the private sector reforms to IR35 will be incredibly damaging for the UK’s contracting sector, but their concerns have been largely ignored until now. 

Research carried out last year showed that 75% of accounting practice partners thought the reforms of IR35 should be postponed, with the majority believing the legislation will have a detrimental impact on the contracting industry. Perhaps even more worryingly, in a survey we carried out last December with self-employed people in the UK, 57% admitted they didn’t even know what IR35 is, highlighting the lack of transparency around the policy in general. 

Before the coronavirus pandemic took hold, however, the government showed no desire to delay implementing the reforms - despite widespread resistance from the contracting industry and a subsequent House of Lords review into the legislation. It’s a shame that it has taken a global pandemic for any action to finally be taken, although it’s good news that this unhelpful policy has now been deferred, even if it ends up merely being a year-long stay of execution. 

Sadly, IR35 is just simply another reiteration of governments lack of support for the self-employed and gig economy workers. While some steps have finally been taken by Rishi Sinak to support this part of the economy during COVID-19,  these have actually underlined how fragile and unsupported the industry is. 

For decades the self-employed have been the forgotten foot soldiers in the UK’s economy, existing outside of mainstream employment and practically invisible to everyone except the chosen few clients who they work with. Excluded from the same statutory protections as employed workers, they face huge risks and uncertainty but are regularly placed at the bottom of the priority pile. 

It is frustrating that the importance of such a rapidly-growing section of the economy is being downplayed. Self-employed people provide essential business services across the country and play a vital role in stimulating wider economic prosperity, so they deserve to be treated equally to those in ‘traditional’ employment.

How the reforms will affect freelancers and contractors

The reality is that the freeze on IR35 reforms that initially warranted ‘welcome relief’ brings very little tangible comfort. In one sense, contractors will have more time to prepare, but eventually, the reforms are still going to be implemented and will have the same, huge impact on the sector. The whole concept of IR35, in my eyes, is fundamentally flawed; it clamps down on “disguised employment” by attempting to treat contractors in the same way as employees assuming the two groups are the same, which is simply not true. 

Ultimately, reforming IR35 legislation into the private sector is likely to have a dramatically negative effect on UK freelancers and contractors no matter what date it comes into effect. The decision will essentially push them into quasi-employment but without any of the protections that they would receive if they were actual employees. Our own research found that among business owners who actually know what IR35 is, the majority believe that the legislation will have negative consequences for independent workers - and while the news of a year delay will certainly provide relief in the short term, this cannot be seen as a sustainable, long term solution. 

The fact is that contractors and freelancers in particular, do not receive statutory sick pay, holidays, maternity leave or any of the other standard protections that their employed counterparts enjoy. It’s become the accepted trade-off for having a flexible work-life balance and the freedom that contracting and freelancing offers. But the COVID-19 crisis is going to highlight just how unsustainable this situation is - as increasing numbers of these workers start to face financial hardship due to illness. 

An opportunity to rethink

The delay to the private sector IR35 reforms due to COVID-19 could actually represent an important opportunity to completely rethink how we treat our flexible workforce. As a nation, we’ve been complacent about acknowledging the challenges and sacrifices that many freelancers, contractors and self-employed people face. Now that there is a genuine crisis affecting all areas of the economy, it’s shining a light on how vulnerable these workers are.

The future is very uncertain and no-one really knows what work in the UK will even look like later this year. I hope that the government will see sense and use the coming weeks and months to find new ways of supporting contractors and freelancers, rather than punishing this key part of our economy.

Ed Molyneux is CEO of FreeAgent.

Ed Molyneux
Ed co-founded FreeAgent in 2007 with a view to “democratise accounting” for micro-businesses - making people feel smart, not stupid, about their finances.