IR35 was introduced in 2000 by Gordon Brown as a way to clamp down on contractors and freelancers who were avoiding paying tax and national insurance by hiding behind ‘personal service companies’. The problem is that, once they’re taxed as the company’s employees, freelancers can lose up to a quarter of their income.
Prisk says IR35 will be one subject of a comprehensive review of small business taxation set to take place over the summer. The problem, he says, is that it’s difficult to pin down: ‘it’s a constantly changing set of rules’, he says. As a result, HMRC has lost reams of cases against contractors wrongly accused of avoiding tax since its introduction – which can’t have come cheap for the taxpayer.
The news will come as a relief to businesses, for whom employing freelancers was made more complicated when the legislation was originally introduced. Taking on contractors was an easy way to increase the workforce without the added complications of holiday, tax and NICs – once IR35 was introduced, though, taking on freelancers became almost as fraught with red tape as taking on an ordinary employee.
Could the government have an ulterior motive for abolishing the cuts, though? With a large portion of the public sector perhaps about to find itself without a job, entrepreneurial businesses are going to be key to taking up the slack. Abolishing IR35 will no doubt make it easier for businesses to bring in freelancers and contractors – so it could be that the Government is simply attempting to make it as straightforward as possible for businesses to absorb public sector shockwaves created by the Budget.
IR35 may not be the most exciting story of the day – but for the 1.4m freelancers who would be affected by the change, scrapping it will be big news.