IR35 – What the Reforms Repeal Actually Means for You

On 23rd September, while delivering his mini-budget, Chancellor Kwasi Kwarteng announced a wide-ranging series of tax cuts and reforms, with a focus on incentivisation, investment, and making Great Britain more competitive on the global stage. However, the most surprising  announcement of the session was the decision to repeal the reforms made to the IR35 off-payroll working regime in 2017 and 2021.

He said, “To achieve a simpler system, I will start by removing unnecessary costs for business. We can also simplify the IR35 rules, and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.? 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.”

The announcement came as a shock to both the general public and the officials at the HM Treasury and HM Revenue and Customs, who shared that the decision had been made by the Chancellor without consultation. The announcement has since generated significant buzz since the IR35, and its previous reforms have been under serious scrutiny and a topic of debate for many across the UK.

A Quick Overview

IR35 ensures that a worker pays the correct tax and NI. If the relationship between a worker and the end-client is effectively the same as it would be if an intermediary didn’t exist, then a worker will have deductions applied which are broadly equal to a direct/salaried employee of the client.

It is important to remember that being ‘inside’ IR35 does not mean the worker is entitled to the same employment rights as a direct employee. HMRC distinguishes between being employed for tax purposes versus being employed for employment rights purposes.

However, the Off-payroll working reforms made in the previous years were not a success. In July 2021, Governmental departments published accounts that revealed the absurd outcomes of HMRC Off-payroll enforcement in the public sector. The Department of Work and Pensions (DWP) was handed a tax bill by HMRC for £88m over incorrect IR35 determinations. News stories continued, and in February 2022, the National Audit Office (NAO) reported that the total tax bills of Government departments to date due to Off-payroll non-compliance were £263m. These government departments were educated by HMRC's Off-payroll guidance and teams and used HMRC's Check Employment Status for Tax tool. The NAO also highlighted their concern over the legislation's lack of an offsets provision, resulting in contractors paying zero tax.

What has changed?

As a result of the 2017 and 2021 reforms, End-Users currently must determine whether an arrangement with an individual constitutes deemed employment for the purposes of the regime and, where relevant, provide details of that determination to other parties in the contractual chain. To the extent that the determination of the End-User is one of deemed employment, usually, it will then be for the party in the contractual chain which makes payments to the Personal Service Company (the Fee-Payer) to include the individual on their payroll and account for the relevant income tax and national insurance liabilities on the payments made to the Personal Service Company (PSC).

The regime currently imposes a significant compliance burden on End-Users and, in many cases, has resulted in increased business costs and complexity. This in turn has resulted in many End-Users restricting the use of PSC arrangements and moving to alternative engagement models, through the increased use of “umbrella companies”.

It is important to note that the repeals announced by the Chancellor were not of the entire IR35 regime but the reforms made in 2017 and 2021. This means that the regime that existed before those reforms will once again apply to all relevant engagements, which in turn will mean that it will be the responsibility of the individual / PSC (and not the End-User) to determine employment status and to deal with the resulting tax consequences. The repeals will mean that the responsibility of determining a contractor’s IR35 status will revert to the contractor, as will the tax liability. 

When Will It Be Implemented?

The repeal is set to be implemented at the beginning of the following tax year, on 6 April 2023. Till then, End-Users must continue to comply with all their current obligations under the IR35 regime, carrying out employment status determinations, passing those determinations down the supply chain, and paying the right amount of tax and NICs.

Although such obligations will fall away from 6 April 2023, ahead of that date End-Users will need to consider the wider implications this will have for their business and to act accordingly.

On the other hand, Dave Chaplin, CEO of IR35 Shield, remarks "I'm old enough to remember as far back as 17 March 2020, when the then Chief Secretary to the Treasury, Steve Barclay, stood up in the House of Commons on the day the proceedings for the Finance Act for 2020 began, and announced there would be one year's delay. Many businesses were unhappy, having already spent considerable sums preparing for the roll out the following month."

The cautionary tale might not be too far off, considering how the repeal of the Off-payroll rules is currently published intent but not in the statute. The next Finance Bill will need to be drafted, laid before the house for First Reading, and then travel through Parliament in the usual way. Initial drafts for an Autumn Bill are likely to be seen around the start of November, with it reaching royal assent sometime in February 2023. Until then, Off-payroll is still binding law.

What Will It Look Like for Businesses and Contractors?

After the repeal, businesses will no longer have to worry about IR35 status, they will simply be able to engage with contractors with confidence. This will bring about a huge shift in the market – both in the public and private sectors – and will see the end of blanket determinations, bans on engaging with contractors and other negatives that we have seen come into effect over the last few years. It will become significantly cheaper for businesses to engage with contractors, a huge saving that allows them access to a greater pool of talent. 

Contractors will have responsibility for their IR35 status and tax liability again, giving them more control over their income, as well as broadening the opportunities available to them. It will remove a lot of unnecessary stress and allow more contractors to continue being self-employed in the long-term. It may even give contractors who stopped being self-employed because of the reforms the confidence to return to contracting. 

Redline Group’s mission is to enable high-technology companies to build world-class teams through knowledge-led recruitment. As businesses look to achieve a more flexible operating model, including a more agile workforce, the number of people in contract, interim and temporary roles are expected to increase. Click here to download our guide on Off-payroll (IR35) for free.

For more information regarding how we can help your business, please contact Peter Livingstone, Director of Contract & Interim on 01582 878852 or email PLivingstone@RedlineGroup.com.