Contractors and businesses can now rejoice in the fact that IR35 reforms (reforms to the off-payroll working rules)have been repealed. This means that beginning 6 April 2023, the responsibility for determining employment status for the purposes of tax and national insurance contributions (NICs) shifts from organisations back to contractors and others who are working for the organisation through an intermediary such as a personal service company.
IR35 reforms were first implemented in 2017 in the public sector and then in 2021 in the private sector. Organisations became responsible for determining a contractor’s worker status — essentially, whether the contractor counted as an employee or was self-employed.
The reforms were meant to crack down on contractors exploiting IR35 rules to avoid paying as much tax as they would, had they been working directly for an organisation. However, many contractors and the organisations employing them criticized the reforms as onerous and unfair.
Before, contractors were able to determine if they were within the IR35 rules. Some contractors were trying to cheat the system by deliberately misclassifying themselves as working outside IR35 in order to pay less tax, according to Her Majesty’s Revenue and Customs (HMRC).
This is due to the fact that contractors doing their scope of work inside IR35 meant that they would be expected to make the same pay-as-you-earn (PAYE) contributions and NICs as permanent employees.
Unfortunately, the legislation has received criticism with some deeming it flawed from the start. Neither businesses nor contractors flourished under the reforms. As a result, the new IR35 scheme might have slowed economic growth even as it shored up the government’s tax base.
IR35 rules caused headaches for businesses — creating serious compliance and tax risks for them. One notable example? Several government departments made IR35 status determination errors, resulting in penalties in the millions.
Hence, repealing these reforms removes an unnecessary burden on organisations who wanted to hire a contractor. This also means that businesses may be more likely to engage contractors because they will have more money and time to do so.
Chancellor Kwasi Kwarteng stated, “So as promised, by the prime minister, we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”
While organisations may feel some relief with this repeal, it comes much too late to counteract the frustration many must feel since they had to invest a significant amount of money and time on compliance — like investing in compliance software.
Moreover, just because the legislation is being repealed, it doesn’t mean it’s the end of IR35, since the rules will still exist. Indeed, with the responsibility back on contractors, many will have to brush up on the rules. While the possibility for abuse of the system still exists, it’s likely that HMRC will be watching for contractors who think they can start taking advantage of the system again.
Similarly, businesses will still be subject to other tax rules and could run afoul of tax laws should it be discovered they know that their contractors have misclassified themselves. There are still things for the government to sort out and address regarding the IR35 reform repeal, such as what HMRC will do with businesses who weren’t following the rules in the interim.
Since there are still questions concerning what’s next for both businesses and contractors in both the public and private sectors, the government definitely needs to have a clear plan for what reversing IR35 reform will entail. It’s one thing to announce a sweeping and popular change like this one but another thing entirely to see it through to the end.
All in all, scrapping the IR35 reforms is a win for flexibility for both employers and contractors. What remains to be seen is what happens going forward, and whether the joy felt over this announcement is drowned out by the wider-ranging repercussions of Kwarteng’s mini budget. If you’re looking for a contractor accountant in London or have any questions regarding IR35 rules don’t hesitate to contact us,