Was IR35 meant to peddle zero-rights employment?by
IR35 tax legislation was intended to crack down on tax avoidance, but the reforms harm legitimate contractors while enabling zero-rights employment relationships.
The IR35 tax legislation, introduced over 20 years ago, was intended to crack down on tax avoidance, where firms hired contractors who provided services through limited companies. However, IR35 in its newer form, off-payroll, is having unintended and contradictory consequences, with organisations such as the Department for Work and Pensions (DWP) seemingly exploiting the “zero-right employment” loophole to treat contractors as “deemed employees” – paying taxes like employees, but without providing employment rights or benefits.
According to the DWP’s latest accounts, the department has shifted dramatically in hiring contractors within the past three years. In 2019/2020, around 24% of DWP contractors were hired “outside IR35”, meaning they were engaged as independent contractors responsible for their own taxes. However, the proportion of contractors hired outside IR35 has now plummeted to less than 3%.
The reduction now means almost all DWP contractors are hired as “inside IR35”. Although taxed entirely like regular employees, these contractors do not receive employee rights, holiday or sick pay, notice periods, redundancy packages or other typical benefits. They are left entirely unprotected, despite paying the same tax.
HMRC had estimated previously that only around one-third of contractors would fall inside IR35. However, their practices and the DWP accounts suggest the impact on contractors’ rights is far more significant than anticipated. HMRC also seem to be systematically assessing all contractors as inside IR35, potentially breaching their professional standards that promise fair and impartial treatment.
Far from protecting worker rights, the new off-payroll IR35 reforms have facilitated a loophole for employers such as the DWP to exploit, reducing costs by hiring contractors without any responsibilities as actual employers. Opposition parties warned Parliament that this would happen, but those warnings were ignored.
The blanket banning by DWP and other government departments has also limited the talent pool they can attract, as top contractors are reluctant to work on inside IR35 terms. Taking away contractors’ ability to operate as independent professionals fundamentally changes the dynamic and appeal of contracting engagements. The DWP may be filling positions but struggling to acquire the best expertise.
HMRC justified the original IR35 rules in their March 1999 press release because workers had to “pay a price in terms of loss of protection under employment law”. But by classifying most contractors under deemed employment, the DWP strips away the rights and security envisaged by HMRC when introducing IR35.
Zero-rights employment surge
Rather than safeguarding contractor rights, the unintended consequences of the reforms have seen a surge in zero-rights employment. Engaging contingent workers under deemed employee rules appears to be a deliberate strategy of the DWP to cut costs and increase control over contractors without the obligations of an actual employer. Is that ethical?
While the flexibility of the UK economy is attractive for many, for contractors to be classified like regular employees but excluded from all safety nets and benefits seems grossly unfair. With often reduced bargaining power as individuals, people are vulnerable to big businesses eliminating overheads by exploiting this loophole created by a flawed policy implementation.
Rather than curtailing tax avoidance, the reforms harm legitimate contractors while enabling zero-rights employment relationships, betraying the principles IR35 intended to uphold. The unintended consequences highlight the need for a complete policy review. If the goal is to protect worker rights and entitlements, the evidence shows the recent IR35 reforms are utterly inadequate and counterproductive.
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Dave Chaplin is the CEO and founder of contracting authority ContractorCalculator and tax compliance firm IR35 Shield. Dave was an IT contractor before founding ContractorCalculator in 1999. IR35 Shield enables firms, agencies and contractors to remain...