Rishi Sunak, the chancellor of the exchequer, has bowed to industry pressure over tax changes affecting tens of thousands of companies and 230,000 freelance contractors by promising that tax officials will not be “heavy handed” in enforcing the law for the first year.
Changes to the off-payroll working rules, known as IR35, are due to come into effect in April in spite of a furious lobbying campaign by freelancers and businesses to halt the reforms.
The new law will require all companies — apart from those with fewer than 50 employees or less than £10.2m annual turnover — to assess the employment status of any person they hire, who works through a limited company.
Companies and their recruitment agencies will be liable for unpaid tax if HM Revenue & Customs finds that a worker has been wrongly classified.
But speaking at an event in Birmingham on Saturday night, Mr Sunak sought to reassure the business community by promising that the policy would have a soft landing.
“I’ve spent time with HMRC to ensure they are not going to be at all heavy handed for the first year to give people time to adjust as well which I think is an appropriate and fair thing to do,” he said.
He also added that an ongoing government review into the implementation of the policy, which is due imminently, “will have some tweaks and improvements to make sure that the transition is as seamless as possible”.
Businesses and freelancers, along with tax and professional bodies, claim that the changes will lead to a slowing labour market as well as increases in red tape, business costs and worker disputes. Many companies appear ill-prepared for the changes.
Mr Sunak, who became chancellor this month after the shock resignation of Sajid Javid, is expected to publish the results of the review into the smooth implementation of the IR35 changes before his Budget on March 11.
The Treasury said: “We recognise that this is a significant change for businesses, and as the chancellor has said, HMRC wants to take a supportive approach to help businesses to apply the rules correctly going forwards.”
HMRC has set up dedicated teams providing education and support to all businesses, public bodies and charities affected by the change.
This includes support for 2,000 of the UK’s biggest employers and direct communications to about 40,000 medium-sized businesses. The Treasury said this was supported by workshops, online learning and round tables.
But Mr Sunak defended the government’s decision to bring in the changes.
He said: “[The reforms are] going to mean some changes because some people unfortunately were operating in a way that they weren’t paying the tax they probably should have been, because essentially they were employees but they were being taxed as if they were self-employed.
“And there is quite a difference there. And it’s not fair to all the people who are employed that someone else could be doing the same job and paying less tax. Because ultimately that tax pays for the NHS and social care and everything else.”
