The main lesson that should be drawn from difficulties in implementing the IR35 off-payroll working (OPW) reforms in 2017 and 2021 is that the fundamental problems underlying the taxation of work remain, according to ICAEW’s Tax Faculty.
The OPW problem will only be resolved permanently if the incentives to arbitrage employed or self-employed tax and national insurance contributions (NIC) are reduced.
This could be achieved if the total amount of tax and NIC payable by individuals and the engagers of workers was the same, or more closely aligned, across all sources of income. They should not vary depending on employment status or the type of engagement.
ICAEW’s Tax Faculty made this point in its written evidence submitted on 11 February 2022 (now published as ICAEW REP 38/22) to the Lessons from implementing IR35 reforms inquiry launched by the Public Accounts Committee on 12 January 2022.
Solving this requires an informed national debate, including on whether the genuinely self-employed should have a reduced tax/NIC bill, and what the reduction should be if so.
It is now nearly five years since Matthew Taylor, in his welcome July 2017 Good Work report, recommended that the level of NIC paid by employees and self-employed people should be moved closer to parity. Since then, the government responded to the Taylor report in February 2018 and published its Good Work Plan in December 2018. Wider reforms have been made to employment rights law, but no consideration has been given to tax and NIC.
In addition, having multiple classifications for employment law but two for tax and NIC, (ie, employed and self-employed), is not sustainable. Recent Court of Appeal cases, such as Atholl House (Kaye Adams)  EWCA Civ 501 and Kickabout Productions (Paul Hawksbee)  EWCA Civ 502, illustrate the difficulty of ascertaining employment status. A long-term rethink is needed.
The Tax Faculty appreciates that reforming or replacing NIC in particular would be a fundamental step and would need to be linked to benefits and rights. However, until this nettle is seized and considered holistically through informed discussion, any solutions such as IR35 will continue to do little more than nibble at the edges of the underlying problem, while imposing costly compliance burdens on businesses.
We therefore trust that the review to consider how the government can best support a thriving future UK labour market, announced on 12 May, to be headed by Mark Warman MP, will seize the opportunity to consider how to resolve these fundamental problems.
ICAEW Know-How from the Tax Faculty
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
More support on tax
ICAEW's Tax Faculty provides technical guidance and practical support on tax practice and policy. You can sign up to the Tax Faculty's free enewsletter (TAXwire) which provides weekly updates on developments in tax.Sign up for TAXwireJoin the Tax Faculty
The future of tax after COVID
As digital technologies transform society, the UK government is grappling with balancing the books while ensuring its tax system is fit for purpose. Join us as we take a look at the issues and challenges facing the tax system.Read more
More from the Tax Faculty
Stay up to date with the latest developments in tax by signing up to the Tax Faculty's weekly enewsletter
Comprehensive support for Tax practitioners each month from the Tax Faculty and expert contributors.
Expert advice from the Tax Faculty's technical managers on all the developments in tax policy and practice.