The red tape crisis choking Britain’s self-employed

It used to be the case that contractors would evaluate their own IR35 status. But reforms introduced in 2017 and 2020 shifted this burden on to the employer.

Many firms, for fear of getting the rules wrong, have since imposed a blanket ban on contractors working through a limited company or miscategorised them as “within IR35”.

Mr Maley said: “Whichever way you look at it, the introduction of IR35 reform saw thousands of genuinely self-employed freelancers and contractors left with little option but to become employees – whether that’s by working through umbrella companies or becoming permanent employees.”

Every year, freelancers fork out £1.5bn because the reforms cause them to be taxed as employees and not self-employed workers. The Office for Budget Responsibility originally estimated it would cost freelancers half this much.

Tax disputes over whether or not a freelancer should be placed within IR35 can drag on for years, with HMRC sometimes pursuing contractors all the way to court. The case may end with the freelancer paying huge tax bills, or it may turn around they were outside IR35 all along.

There is another piece of legislation that HMRC is using “as a new stick to beat the self-employed with”, Mr Chamberlain said.

In 2022, HMRC sent income tax bills of up to £50,000 to over 1,000 contractors, saying they had used accountancy firms in breach of managed service company (MSC) law.

This little-known law was introduced to stop company directors paying less tax by handing over control of the company to a third-party, like an accountant.

But Mr Chamberlain said HMRC was applying the law to accountancy firms with branches specialising in self-employment who had done nothing wrong.

A number of contractors have disputed their bills. No decision has yet been made and so the case may reach a tax tribunal.

“Unless the Government gets on top of this, the self-employed will continue to get hit by massive tax bills,” said Mr Chamberlain.

Through these “unfair policies”, he added, the Conservatives have come to be viewed as a party that “believes everyone should be an employee”.

It is a reputation that could come back to haunt the Tories as the general election draws closer.

Mr Maley said: “With a general election on the horizon, whichever political party simplifies and lowers taxes for the four million plus people working for themselves in the UK has a chance at winning their support. It’s an open goal.”