Government scraps tax rule changes for contractors: business respond with relief, but fundamental problems remain – comment from Pinsent Masons

by | Oct 18, 2022

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Penny Simmons, Legal Director at Pinsent Masons, the multinational law firm, says that today’s scrapping of proposed changes to the tax rules around off-payroll work – known as IR35 – is likely to be met with relief from businesses in the short term, but fundamental problems with the system remain.

Says Penny Simmons: “In the longer term, IR35 still doesn’t work properly and needs to be heavily reformed. However in the short term, businesses will be relieved that they don’t have to scrap all the work they have done in the last few years to be compliant with the current rules.”

Penny Simmons explains that many businesses had been frustrated that they had spent significant amounts of time and money to become compliant with the new IR35 rules and would now need to repeat the process as the rules changed yet again. There is some relief that this will not now need to happen.

However, businesses say that the 2021 rules, which will now stay in place, are still much too burdensome in requiring businesses to take legal responsibility for all the contractors and third parties in their labour supply chains. Pinsent Masons says that far-reaching reform of the system now needs to take place.

Adds Penny Simmons: “The mini-budget was an admission that the 2021 version of the IR35 rules wasn’t working – it imposed too much of a compliance burden on businesses. However it’s broadly accepted that the 2017 version of the IR35 rules that were in place until last year didn’t work either and led to widespread tax avoidance.”

“It would be good to see the Treasury take this opportunity to undertake a comprehensive review of the IR35 rules and commit to real reform. That should include dealing with one of the major issues with IR35 – the complex test for determining whether someone should be an employee or self-employed.”

“The Government should now consult with businesses, tax professionals and stakeholders across industry to develop a tax system that’s fairer to businesses and off-payroll workers and isn’t vulnerable to tax avoidance.”

“There can never be a return to the ‘old way’ of handling off-payroll work, involving contractors being paid through personal service companies. The tax risk landscape has shifted hugely over the past five years. The introduction of corporate criminal tax offences means that businesses must now have far greater oversight of their supply chains. If their contractors evade tax, businesses are now exposed to criminal liability if they know that they should have been paying those contractors as employees.”

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