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Was IR35 meant to peddle zero-rights employment?

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IR35 tax legislation was intended to crack down on tax avoidance, but the reforms harm legitimate contractors while enabling zero-rights employment relationships.

16th Aug 2023
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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%. 

Entirely unprotected

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.

Blanket banning

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.

Replies (11)

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By Justin Bryant
16th Aug 2023 16:38

I thought IR35 was only relevant when contracting via a personal company etc. As far as I know, there's been no recent law change for people contracting normally as self-employed directly themselves without a company etc. intermediary.

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Replying to Justin Bryant:
By Ruddles
16th Aug 2023 19:10

Agreed. It is a lazy description used by some as a catch-all term covering individuals caught under the usual employment tests as well as those subject to the deemed employment rules for PSCs (and other intermediaries)

Even. HMRC seem to understand this.

https://www.gov.uk/guidance/understanding-off-payroll-working-ir35#who-t...

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Replying to Justin Bryant:
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By richard thomas
16th Aug 2023 19:13

Quite right - it's not described in the law as the "intermediaries" legislation for no reason. Where a contractor chooses to use a company to employ them and contract with the client, they have the employment rights of any employee of their own company. Parliament is entitled to say that, just as with labour only subcontractors in the construction industry, it will require deduction of tax from the payments (think of Australia and Ireland for two examples). The CIS does not imply that there is any change in employment rights, and neither does on payroll IR35.

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Replying to richard thomas:
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By Justin Bryant
17th Aug 2023 08:57

In fact, that's the main reason I posted this OP, as of course there could be PAYE/NIC liability for the "employer" there regardless of IR35 (as we all know).
https://www.accountingweb.co.uk/any-answers/would-he-be-taxed-as-employe...

It would not surprise me if it was misleading articles like this that are causing this problem (through basic misunderstanding of the law) in the first place.

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Replying to richard thomas:
RLI
By lionofludesch
21st Aug 2023 08:10

richard thomas wrote:

Quite right - it's not described in the law as the "intermediaries" legislation for no reason. Where a contractor chooses to use a company to employ them and contract with the client, they have the employment rights of any employee of their own company.

They don't always "choose". Sometimes they're bullied into it by their clients.

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By WhiteRose
16th Aug 2023 19:02

“Peddle” surely

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Replying to WhiteRose:
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By richard thomas
16th Aug 2023 19:07

More likely than "pedal", unless the author was only including those who cycle to work. But what does it mean for IR35 to "peddle" a lack of employment rights. "Peddle" is the verb describing what pedlars do - itinerant sellers of parts and pans and brushes.

Thanks (2)
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By richard thomas
17th Aug 2023 19:41

I've found the missing "peddle". It ended up as an attributor to a bin mentioned in a recent post headed "Pre-letting expenses", and it was in anticipation of that the the "pedal" arrived in this post.

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By listerramjet
18th Aug 2023 10:35

I am fairly sure that IR35 legislation was designed to stop off-payroll "employment" thus harming the legitimate business model of a number of industries. HMRC has long wanted to force most income tax through the PAYE system for obvious if muddled headed reasons. the legislation was unfair in a number of key regards, and there have been fairly high profile cases, some of which HMRC have rightly lost. What is wrong is to refer to sub-contracting as tax avoidance. And the policy remains wrong.

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By JamesDS
18th Aug 2023 15:02

It's much worse than this Dave.
Virtually all of the non-clinical temporary labour frameworks under which government hires contractors, including the infamous Public Sector Resourcing contract, force all contractors inside IR35. Further, all the government consultancy suppliers that i've come across (>30) ONLY hire inside IR35.

Blanket decisions are the norm, not the exception.

Further, on top of the contractors' excess tax costs, they receive a pension worth a few pence per month, have to suffer employers and employees NICs and pay the profit margin of the umbrella organisation - a company type that exists solely to collect for HMRC at the contractors expense.

The pendulum has swing so far away from fairness and uniform treatment of TPs that it's not at all surprising that they're leaving public sector employment (just as the doctors did over the pension rules).

Contractors are also waiting patiently for the eventual court challenge that will (one hopes) correct it, so they can add themselves to the list of plaintiffs.

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By tonyaustin
22nd Aug 2023 11:22

Employment legislation and tax legislation are not directly linked. Until they are, there will be anomalies. IR35 was intended to prevent avoidance of PAYE regulations by employing someone through an intermediary. PAYE regulations apply to anyone treated as an employee under the tax legislation.

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