Policy Explainer IR35

In January, Kaye Adams, the Loose Women TV presenter, won a 10-year battle with HMRC over a £124,000 tax bill.

The tax authority decided it would not appeal a court judgement from November 2023 that ruled Adams’ company, Atholl House Products, was outside IR35 legislation, which covers off-payroll working.

HMRC began investigating the TV presenter’s IR35 status in 2014 in relation to freelance contracts she held with the BBC. The tax office believed she came under the rules in 2012/13 and 2016/17 and therefore owed £124,441.

A Court of Appeal hearing in 2022 ruled in favour of HMRC but was challenged by Adams in 2023. Her appeal was upheld at the end of November.

Seb Maley, chief executive of IR35 specialist Qdos, said: “HMRC has finally admitted defeat. The tax office has recklessly pursued this case for the best part of a decade – at a huge cost, both to Kaye Adams and taxpayers, whose money has been wasted.

“There’s no doubt the amount spent by HMRC exceeds the £124,000 tax liability being argued over. It’s been a completely wasted exercise, calling into question the tax office’s understanding of the very rules it created and attempts to enforce.”

What is it?

The term ‘IR35’ refers to the intermediaries legislation contained in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003.

The IR35 rules were introduced to prevent individual suppliers and freelancers from reducing their tax bill by posing as contractors, when the type of work they do means they are essentially employees of a company in all but name.

It meant that contractors had to self-declare whether or not the work they did meant they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35).

If a contractor is classified as being outside IR35, this means they pay taxes as a self-employed individual.

However, if they are deemed as being inside IR35 they will be taxed in the same way as a permanent employee, meaning they can pay up to 30% more in tax.

Reform

The rules were reformed in April 2017 in the public sector, resulting in contractors handing over responsibility for determining how they should be taxed to the public sector bodies that engaged them. The same reform was rolled out to the private sector several years later.

At the time, HMRC said this was to stop suppliers deliberately misclassifying themselves as being outside IR35 to reduce their tax bill.

However, one of the unintended consequences of these reforms was that those responsible for hiring external suppliers struggled with the added administrative burden, because the changes meant they had to individually assess every contractor they engaged.

This led to many employers introducing hiring bans that prohibited them from using contractors.

Budget Clarity?

According to a recent Qdos survey, featuring responses from 900 IT contractors, more than two-thirds want to see the current IR35 rules scrapped, with nearly 50% of participants citing the reform as a cause of poor business performance in 2023.

The damning responses may give ministers, who are searching for answers to resolve Britain’s low productivity issue, some pause for thought.

Maley at Qdos has called on the government to overhaul the rules in the forthcoming Budget.

He said: “With the Spring Budget rapidly approaching, if repealing the legislation is out of the question, at the very least the government must resolve the major issues relating to IR35 and the off-payroll working rules.”