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Labour’s first 100 days: What HR wants from IR35 and tax

The IR35 tax system is outdated and ineffective, according to David Chaplin, CEO of tax advisory IR35 Shield

The new UK government should urgently review IR35 and tax for umbrella companies, according to our commentators.

In its first 100 days, the Labour government must review the IR35 tax, which is designed to close a loophole in the tax system whereby workers could pay less tax by setting up a limited company (or partnership), than they would if employed. 

If workers are deemed ‘inside' IR35 they are taxed as an employee, meaning they can pay up to 30% more in tax. David Chaplin, CEO of tax advisory IR35 Shield, described the system as outdated and ineffective.

He told HR magazine: "The current tax regime for incorporated freelancers is not the same today as it was in April 2000 when IR35 was first proposed.

"The stark reality is that the tax differentials between the incorporated freelancers and salaried employees are very close. The main difference in taxes generated is due to the employers' national insurance contributions.

"Freelancers are paid more, because they do not have rights, and on-demand services are priced higher than salaried workers. A comprehensive analysis of the impact of the damaging IR35 changes, together with an honest comparison of tax generation, could only lead to one conclusion – IR35 needs to go.”

Read more: IR35 backlash continues as Spring Budget nears

IR35 has been the subject of many high-profile cases, including that of TV presenter Adrian Chiles, who returned to court for a third time over HMRC’s claim that he had underpaid £1.7 million in tax due to IR35.

In Chiles' case, upper tribunal judges described IR35 as confusing and a “moving target.” The judges wrote: “The case law in relation to both employment status and IR35 has not only developed considerably over time but continues to be in a state of flux.”

While the previous government cut national insurance for freelancers, the new leadership must take more drastic action to avoid costly cases such as these, according to Bukki Adedapo, international expansion leader at freelance jobs platform Fiverr.

Speaking to HR magazine, he said: “The Labour government has previously indicated it would look to simplify classifications for contractors in the UK which is very encouraging, but I would like to see them take a much closer look at IR35 and provide more clarity around the legislation. 

“Whilst the previous government did reduce national insurance contributions from 8% to 6% for the self-employed, more needs to be done to support them. Considering how integral freelancers and the self-employed are to the UK workforce in 2024, the government needs to do as much as it can to support them.”

Paul Newsham, CEO of the Payroll Compliance Authority, added that the new government should crack down on taxing umbrella companies, which serve as the intermediary between a contractor and an end client or recruitment agency.

Umbrella companies employ contractors working on temporary assignments and invoice the client for the work carried out. However, they have been criticised for their lack of regulation and tax evasion.

Read more: Tax avoidance loophole sparks concern for employers

Newsham told HR magazine: “I think Labour’s employment priorities should include a thorough review of the progress by the previous government into regulation of the umbrella company market. Tax evasion is a monumental issue in the UK, with thousands of contract workers put at risk daily because of the lack of regulation in the umbrella company sector.
“The previous government spent many years reviewing the problems in the outsourced payroll industry. Now it’s time to use these results to fuel action. My hope in the next 100 days is that we will see some progress to tackle tax evasion.

“A thorough due diligence regime needs to be put in place within the umbrella company market to shut down the myriad of tax avoidance schemes run by fraudulent umbrella companies. Let’s hope that Labour is truly the workers’ party that they claim to be.”