IR35 was a controversial piece of legislation when it was first introduced and has remained contentious throughout its many reforms.
The latest reform, which came into effect last year, was designed with the intention of closing a tax loophole, but consequently has also put an administrative and legal burden on companies to ensure they comply.
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Mini budget
As part of former chancellor Kwasi Kwarteng’s ‘mini budget’, the government proposed reversing the 2021 reform, making it easier for companies to hire third-party contractors. At a time when the construction industry is facing many challenges, reversing the 2021 IR35 reform would have hugely benefited both developers and contractors.
The current IR35 rules aim to ensure that the contractors who run their services through a private limited company pay broadly the same national insurance (NI) and income tax contributions as a company employee would. At present, the responsibility is on the company to ensure that the contractor is paying the correct tax and NI contributions, which is judged by IR35 assessments.
“Although developers want to take advantage of the flexibility of skilled contractors, the reformed and complex IR35 rules create a significant burden, meaning that many avoid doing so.”
Contractors leaving construction
However, the added complications and administrative expense has led to many contractors leaving the industry. Contractors are vital to providing the necessary skills and labour for the construction industry to run, especially with so many ambitious UK mega-projects currently underway. But red tape and bureaucracy have caused the number of self-employed, solo contractors operating in construction to drop to an 18-year low. They fell by 10% in the last year alone.
Although developers want to take advantage of the flexibility of skilled contractors, the reformed and complex IR35 rules create a significant burden, meaning that many avoid doing so.
Former chancellor, Kwasi Kwarteng, proposed reversing the latest reform among many other policy changes that received a huge amount of backlash. As a result, much of the conversation surrounding these policies were about the damage they could potentially cause and what the negative consequences would be.
In the case of the IR35 legislation, arguably there are some benefits to the 2021 changes being scrapped, such as lifting the onus from businesses and placing it once again on contractors to ensure their tax filings were accurate.
Lack of change
Placing the liability on contractors would encourage more to return to or enter the sector, as it would be more financially beneficial and there would be more companies willing to employ their services. It would also be beneficial for developers as they would no longer have to undergo lengthy administrative processes to hire contractors, and the risk of liability for tax and NI contribution inaccuracies would be removed.
Reversing the latest IR35 reform was a campaign pledge made by former prime minister Liz Truss during the Conservative party leadership campaign. But, like so many others, she had to renege on that promise. This lack of change will do nothing to address the skills shortage and talent pool limitations of the sector, whilst continuing to pile pressure on developers that are already contending with many other issues.
If the issues surrounding IR35 are not solved there are serious risks to the future development and competitiveness of the industry, as more and more self-employed workers may leave contracting altogether.
Carys Thompson is a commercial partner, and Selina Sodhi is a solicitor, at law firm Shakespeare Martineau
