IR35 and zero-rights employment continues

The government has confirmed it will not align tax status and employment rights for the foreseeable future – this was one of the key takeaways from its long-awaited response to an employment status consultation launched in 2018.

The issue, here, is that by refusing to align these frameworks, all contractors working inside IR35 will continue to work as zero-rights employees. By this I mean they pay tax as though they are employees, but receive nothing in exchange – no holiday pay, paid sick leave or paid maternity.

IR35 and HR:

Employees see "no benefit" to working for umbrella companies

Employers risk losing contractors in IR35 changes

IR35: off-payroll one year on

Zero-rights employment, as it's often been referred to, has been an issue since the introduction of the IR35 legislation in 2000. However, IR35 reform in both the public and private sectors, in 2017 and 2021 respectively, exacerbated the situation considerably.

IR35 reform saw the responsibility for determining a contractor’s IR35 status shift from the contractor to the business engaging the worker. As part of the changes, the liability was transferred from the contractor to whichever party in the supply chain is responsible for paying the worker – typically the recruitment agency, when involved.

Cautious of the consequences of falling foul of the notoriously complex IR35 rules, some businesses, not all, decided to stop engaging contractors altogether. Contractors were told that to keep working for certain organisations they faced a choice: work inside IR35, via an umbrella company, or have their contract cancelled.

This needlessly risk-averse approach adopted by far too many businesses saw an influx of contractors placed inside IR35. It’s a scenario where they are classed as ‘employed for tax purposes’, but one that leaves them significantly out of pocket, sometimes up to 30% worse off, all while receiving none of the employment rights that come as a result of being employed.

The government’s latest response, which has taken four long years to publish, shows just how little those in Westminster understand the needs of contractors and the impact of ill-thought-out IR35 reform.

Expecting a genuinely self-employed contractor to pay tax as an employee but handing them nothing back in return is unjust, illogical and a huge oversight from the government. But in truth, I’m not surprised. This is, after all, the administration that insisted on rolling out IR35 reform despite huge pressure to scrap the changes.

This latest news provides useful food for thought. As the businesses engaging contractors and the party responsible for determining if their contract sits inside or outside IR35, I urge companies to rigorously assess IR35 status to ensure that a contract actually belongs there.

Forcing zero-rights employment on genuinely self-employed contractors will simply deter these workers, leaving your organisation with significant skills gaps at a time when the competition for talent is fierce enough.

Seb Maley is CEO at Qdos