Charlie Cox, Commercial Director at SThree, has been featured in City AM, where he discussed IR35 and the challenges facing the new UK chancellor, Rishi Sunak.

When Philip Hammond announced in 2018 that IR35 would be extended to the private sector, he heralded it as a move that would “open a new chapter in our country’s economic future”.

But fast-forward two years, and the new chancellor, Rishi Sunak, is still facing a huge headache over the tax legislation changes, effective from 6 April.

By rolling out IR35, HMRC is trying to clamp down on instances where a contractor is using a limited company for tax purposes but is operating like an employee. This would mean that those working contractually in this situation would end up paying roughly the same income tax and national insurance contributions as actual employees.

Until now, contractors in the private sector have been responsible for deciding if the IR35 rules apply to them or not. That is all changing, however, and the end company will now make the decision on whether IR35 rules apply to assignments.

The decision-making process that businesses must go through is by no means straightforward and is proving challenging. The government belatedly seems to be realising this.

In a leaked video, Sunak is seen confirming that “we are shortly to publish a review on how it should be implemented, which should have some tweaks and improvements to make sure that the transition is as seamless as possible”. He went on to say that HMRC will not be at all “heavy handed” in the first year.

But “tweaks and improvements” simply aren’t enough.

In a recent survey we conducted, when asked if they believe that the bill as drafted would achieve the government’s objectives, 95% of contractors and 92% of end hirers said it would not.

Additionally, 98% don’t believe that the impact on the private sector has been adequately assessed. In the survey, end hirers were asked if they fully understand what is being asked of them in relation to the reform of IR35 rules in the private sector — 74% confirmed that they did not know. With less than six weeks left until the new rules go live, this is a very worrying statistic.

This confusion is already seriously impacting UK Plc. Companies should take reasonable care in coming to their IR35 status decisions, yet at a time when the UK should be looking to do everything it can to thrive, implementing such reform in this way will make that a very difficult task indeed.

By making hiring contractors more complex and potentially costly, the negatives of IR35 vastly outweigh the positives for both company and contractor as things stand.

There’s also a huge fear factor for businesses around the risk of getting it wrong and incurring the administrative costs, fines and reputational damage that doing so would entail. This could foster a culture where contractors jump ship to businesses that better understand and are able to categorise them correctly.

Those firms that take a pragmatic approach to this reform will have the pick of the best available talent. That’s good for some companies but is causing tremendous trouble for others.

IR35 has real potential to hinder innovation and productivity throughout the UK.

While I’m supportive of the government’s attempts to ensure that everyone pays the appropriate amount of tax, it needs to be done properly. This proposed reform is not representative of that.

Sunak faces a huge challenge as he attempts to balance tax revenues with building a workforce which is fit for purpose. He must assess the real impact of IR35 ahead of its implementation and make a call on whether it goes ahead in its proposed form.

If he takes a step back, conducts a review grounded in data, and gets it right, it could just “open a new chapter in our country’s economic future”.

Find out about Charlie's top tips for preparing for IR35 here.