Government rule out aligning tax status and employment rights

Contractors working inside IR35 will not receive employment rights, Government reiterates

Four years after having held a consultation exploring employment status in the UK, the government has finally responded, only to announce that tax and employment status will not be aligned. It means contractors operating inside IR35 will continue working without employment rights, despite paying employment tax.

This long-awaited response to the government’s consultation, which ran from 7th February 2018 to 18th June 2018, was published alongside new guidance to bring clarity regarding employment status, both for workers and the businesses engaging them. 

While this guidance has been welcomed in some circles, as confusion over employment status among gig economy workers increases, the fact that the government have ruled out aligning tax status and employment status has been met with criticism by contractors and industry experts. 
 

Why is tax status and employment status alignment a contentious issue?

Following IR35 reform in both the public and private sectors, the number of contractors operating inside IR35 increased. This is because medium and large businesses (along with public sector bodies) are now responsible for determining IR35 status. 

The reform has resulted in more contractors being classed as inside IR35, where they are deemed ‘employed for tax purposes’ – a status which sees them pay Income Tax and National Insurance Contributions (NICs) at the rate of an employee. However, despite paying tax as employees for income earned on inside IR35 contracts, these contractors are not granted employment rights in return.

This situation has been described by a number of IR35 critics as ‘zero rights employment’, which is an arrangement the government have been under mounting pressure to abolish. 
 

Pandemic and economic context see government rule out alignment 

Upon the launch of the employment status consultation in 2018, there was hope that this issue would be resolved long before the introduction of IR35 reform in the private sector in 2021. By this, we mean aligning tax and employment status to ensure workers taxed as employees receive the rights that come with employment. 

But this latest decision shows there has been little, if any, progress. In response to the consultation, the government stated that whilst “there could be some benefits to greater alignment between the two systems”, the stakeholders that contributed to the consultation “acknowledged that proposals for alignment would be complex and would need to be considered carefully.”

Therefore, and “noting the lack of consensus around alignment, the ongoing economic recovery from the pandemic, and the wider economic context, the government has decided that now is not the right time to bring forward proposals for alignment between the two frameworks.”

A promise was made to “explore longer term options” to improve employment status for tax, to help ensure that it’s “as clear as possible and usable for all parties”, but in reality, this will offer little consolation for contractors. 
 

‘If not now, when?’

Needless to say, the news has been met with disappointment from a number of IR35 experts, including Qdos, who have voiced their frustration with the government’s underwhelming response to this consultation. 

Our CEO, Seb Maley, shared his opinion with The Freelance Informer: “Refusing to abolish what’s known as zero rights employment is unjust, illogical and a huge oversight. 

“IR35 reform has seen tens of thousands of genuinely self-employed contractors left with no choice but to work inside IR35, where they are taxed as employees and can pay anything up to 30% more in tax. 

“Yet still, these workers will not be granted employment rights in exchange. If now isn’t the right time to align tax and employment status, when is?”