Rishi Sunak blinks, says HMRC will ‘go soft’ on IR35 changes in year one

Chancellor Rishi Sunak seeks to reassure freelancers that HMRC will not be “heavy handed” when new IR35 rules come into effect on 6 April

Chancellor Rishi Sunak says the taxman will not be “heavy handed” when IR35 changes come into effect on 6 April, potentially bringing 230,000 sole traders within PAYE.

Answering questions in Birmingham on Saturday night, the new chancellor sought to reassure both companies and freelance contractors, saying the controversial policy will have a soft landing – at least in year one.

HMRC is keen to bring freelance contractors within PAYE in order to tackle what it calls “disguised employment”. Currently freelance contractors, one-man-band limited companies who work on projects for companies, pay corporation tax at 20 per cent instead of higher PAYE rates, while employers duck national insurance contributions. The Treasury sees both freelancers and employers as gaming the system, as effectively many freelancers are full-time employees. The IR35 reforms are projected to bring in £3bn over the next four years.

>See also: One third of freelancers say IR35 changes affecting mental health, contemplating suicide

However, the IR35 changes have triggered howls of protest, with freelancers complaining that rushed implementation has seen unprepared and panicked employers drop them. Nearly one third of freelancers say they are having mental health issues, and even contemplating suicide, because of the uncertainty.

And companies face a £2.2bn productivity black hole, with 75 per cent of freelance contractors saying they have left or intend to leave their clients by April, according to inniAccounts.

‘Another half-baked decision that fails to do the right thing’

Sectors heavily reliant on freelance contractors include financial services, construction, pharmaceuticals, energy and recruitment.

The IR35 changes will require all companies — apart from those with fewer than 50 employees or less than £10.2m annual turnover — to assess the employment status of any person they hire who works through a limited company.

Heavy handed

Sunak said: “I’ve spent time with HMRC to ensure they are not going to be at all heavy handed for the first year to give people time to adjust as well, which I think is an appropriate and fair thing to do.”

Sunak accepted that some self-employed people are going to lose out from the changes but defended IR35, saying that it would end the discrepancy when two people are essentially doing the same job, only one pays less tax than the other. “Ultimately that tax pays for the NHS and social care and everything else,” he said.

However, inniAccounts CEO James Poyser lambasted Sunak’s promise of a soft landing as “another half-baked decision that fails to do the right thing – it simply adds rather than detracts from the crisis”.

>See also: More than four in 10 businesses could phase out contractors due to IR35

Poyser added: “If the Treasury is now acknowledging there is a risk to UK plc following feedback from businesses, professional bodies and contractors then it needs to be bold and say it will provide the delay and properly engage with organisations and those effected. Until then, a soft landing means nothing because ultimately the legislation won’t change. The ‘right thing’ is listening to the calls for delay, properly reviewing the evidence that all says it will cripple industry, and to then change the legislation and remedy how it is implemented.”

And writing on his blog today, Dave Chaplin of Contractor Calculator – an outspoken critic of the IR35 changes – wrote: “Six weeks before the private sector extension of the Off-Payroll Tax, new Chancellor of the Exchequer Rishi Sunak holds up a naked flame. With one fell swoop on 6 April 2020 he could reduce the UK’s flexible workforce to ashes … the Tories have doused the UK’s flexible workers in petrol, but it’s not too late to blow out the match.”

Meanwhile, Rishi Sunak is expected to publish the results of his review into the implementation of IR35 ahead of the Budget on 11 March, which is likely to include an information drive for smaller businesses affected by the changes.

However, not everyone is sympathetic to the upending of freelance contractor arrangements.

Commenting on Sunak’s reassurance to the business community, one employee wrote: “As a lifetime tax payer working along side day raters I have no sympathy – payback time.”

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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