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The changes in off-payroll working rules deliver an estimated £1.8 billion in additional tax. Case closed, the government suggests.

We’ll spare you a repeat of the timeline of events that led us here. Unless you’ve been living under the remotest of rocks for the past few years, you’ll know all about the changes to IR35, the rules governing ‘off payroll working’.

For years now, we’ve been hearing anecdotal evidence of how contractors found themselves without work as companies eager to avoid the pitfalls of IR35 terminated contracts. We’ve reported the challenges many individuals, organisations and their fraught HR and payroll departments had using HMRC’s CEST tool to establish the correct status of contractors, only to find that in almost 20% of cases (at its worst point) the tool gave an inconclusive answer. And we’ve heard of the costs involved in implementing the reforms.

Fortunately, a new review into the impacts of off-payroll reform has found that things worked pretty well, actually.

IR35 review: the good

According to the review by IFS research, the reforms led to an additional £1.8 billion paid in tax, which was the chief aim of the entire exercise. The revenue was generated by 250,000 workers (around 2.5% of the self-employed workforce) who moved from their previous off-payroll positions as a result of the reforms. The report estimates 130,000 of these would not have moved under the old rules.

Additionally, and contrary to the conventional wisdom, around half of those surveyed said they had found the reforms easy to implement. Only a quarter found them challenging. And almost all who used the support tools provided by HMRC found them useful.

IR35 review: the odd

It is curious, then, given the rather upbeat nature of the report, that Kwasi Kwarteng ditched the IR35 reforms in his ill-fated autumn 2022 statement. Jeremey Hunt restored them, but that doesn’t remove the question over the initial move. Why repeal something so apparently successful?

IR35 review: the ugly

One clue comes in the report’s findings of the cost impact to business. As The Register notes, HMRC had initially estimated the cost to 60,000 affected firms to be £14.4 million with negligible ongoing costs.

The reality is that, as the report states: “Client organisations have incurred an overall one-off cost of £90 million to £230 million to implement the reform. Clients have also spent a further £150 million to £370 million in the first year on operating the rules, which we expect to reduce over time.”

Even at the low end of that estimate, a combined cost of £240 million is 17 times the initial figure. Use the top end of the estimate and HMRC under-estimated the financial impact on business by about £586 million.

Not plain sailing

There are also issues with the report’s methodology, specifically it’s timing of interviews which, some commentators claim, mean those experiencing the greatest challenges with IR35 didn’t get the chance to give their accounts.

“The periods compared in this report of March 2020 to September 2021 do not provide an accurate picture of the before and after scenario,” Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield told The Register. “Choosing March 2020 as the baseline is somewhat of a statistical howler and means the report paints a less disruptive picture than what occurred in reality.”

Seb Maley, chief executive of contractor consultancy Qdos, told Personnel Today he felt the report was “another government study to add to the growing pile of those which fail to reflect the reality of the situation.”

“This research fails to tell the full story of IR35 reform,” he said. “Read this report and you’d think that the off-payroll rules have been plain sailing.”

Matt Fryer, MD of Brookson Group, took particular issue with HMRC stressing that the reforms affected just 2.5% of self-employed workers. “Is this an indication that the Government is content with the unfairness of this outcome?” he asked Personnel Today.

The reality of IR35

To so many connected with the contracting sector, off-payroll reform has caused significant damage to individuals and businesses. It seems fair to say the government doesn’t quite see it that way.

If you need to find a way to make IR35 work better for you and your payroll team, talk to us.