Budget will focus on shoring up British economy
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IR35 reforms have come under fire recently as one of the factors contributing to the HGV drivers shortage. The unpopular tax changes affecting freelancers and contractors came into force in April, but Chancellor Rishi Sunak chose not to address IR35 in his Autumn Budget announcement this afternoon.
Addressing the House of Commons today, Chancellor Rishi Sunak repeated how the Budget would make the UK economy “stronger”.
Mr Sunak said this Budget “does not draw a line under Covid… We have challenging months ahead.”
But, he ushered in a “new economy post-Covid” and a “new age of optimism”.
Mr Sunak addressed the backdrop of rising inflation, placing the figure from September at 3.1 percent, citing increased demand for goods around the world and global demand for energy.
Mr Sunak continued to say this would not be “solved overnight” and could “take months to solve”.
In April 2021, changes were made to the IR35 legislation to make public sector clients and medium or large-sized clients outside the public sector responsible for deciding a worker’s employment status and how they should be taxed.
However, Chancellor Rishi Sunak neglected to mention the changes in his Spring Budget, instead leaving employers and contractors to grapple with the legislative changes.
The changes made to IR35 in April made it more difficult and more expensive for firms to take on freelance or self-employed workers.
This prompted fears around how IR35 reforms affected freelancers and whether the policy was in keeping with the growing gig economy.
Over time, pressure has mounted on the Chancellor to announce changes to his IR35 reforms, six months on from their debut.
The effects of April’s IR35 reforms have been felt most keenly recently in relation to the ongoing HGV drivers shortage.
Today Mr Sunak announced the HGV levy would continue to be suspended until 2023, and froze vehicle excise duty for HGV drivers.
Jamie Williams, a Director at Lime Advisory in Cardiff said: “The IR35 changes that came into play in April 2021 made a significant impact to the contractor market and had many companies scrambling in the run up to get their systems in order and to make sure they were complying.
“The outcome of this was that a large number of service providers now found themselves inside IR35 and this has had knock on effects: Many contracts would have been on a day rate, and the service provider would have factored in the tax to pay as a Limited Company in negotiating that rate.
“The changes meant a fairly significant increase in tax and NI payable by the service provider, meaning take home pay reduced. Many engagers found themselves having to renegotiate the day rates upwards or risk losing the service provider.
“Many service providers would have decided that the admin in dealing with a Limited Company for pretty much no tax benefit meant that the Company was no longer needed and instead moved onto payroll or worked through an umbrella firm.
“This led to quite a lot of liquidations of companies that were no longer needed. Most of these liquidations will still be ongoing.”
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Some experts have linked the shortage of drivers to the contracted European drivers losing their contractor tax benefits.
Further criticism has been levelled against IR35 reforms that could negatively impact the self-employed, many of whom did not qualify for support from the Government over the course of the last 18 months.
Under IR35 reforms, the rules don’t apply to umbrella company workers.
However, this led to non-compliant umbrella companies seeking to exploit contractors.
Tim Stovold, head of tax at Moore Kingston Smith, said: “The cat is out of the bag now with many businesses now complying with this regime so it would be very disruptive to reverse its implementation now.
“The only glimmer of hope is that the Finance Bill sub-committee launched a call for evidence last week to find out whether the IR35 rules have made it more difficult for engagers to hire people with the right skills and expertise and whether the rules have contributed to job vacancies.
“If the response to this is an overwhelming ‘yes’ to both questions, we may see short-term and sector specific relaxations, but this will be later in the year.”
Many organisations have been pressuring for tighter Government regulation of umbrella companies.
What is IR35?
IR35 is sometimes referred to as “off-payroll working rules” – and it is a set of tax legislation to ensure contractors pay the correct amount of Income Tax and National Insurance.
Updates to IR35 in April mean companies are able to decide whether their contractors were “in” or “out” of IR35.
Inside IR35 means the contractor will have tax deducted from their pay by the employer as if they were an employee.
Outside IR35 means the contractor is responsible for their own taxes, for instance, if they have set up their own limited company.
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