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What is happening to the IR35 rules in 2023?

The government’s rules for working off-payroll, known as IR35, apply when workers or contractors provide services through their own company or an intermediary, ensuring that workers pay the same Income Tax and National Insurance Contributions (NIC) as direct employees.

The IR35 reforms introduced in 2017 and 2021 were poorly received across the public and private sectors. So, when previous Chancellor Kwasi Kwarteng announced in September that these reforms would be rolled back in the next tax year as part of the Growth Plan 2022, many contractors and businesses welcomed this reversal.

However, new Chancellor Jeremy Hunt revealed in his first statement to the House of Commons in October that many of the measures proposed by Kwarteng would no longer be going ahead. This includes the repeal of the IR35 reforms, leaving the current implementation the same.

With so much confusion over the government’s tax plans, where does this leave IR35 – and what should contractors and businesses do now?

IR35 reform rollback proposal

HMRC introduced the IR35 system back in 1999, with the aim of clamping down on tax avoidance by ‘disguised employees’ – workers operating in the same way as a fully taxed employee, but through a private company or intermediary.

If HMRC determines that the working relationship between the contractor and their client is employment and not consultancy, then IR35 rules will apply, so the contractor is taxed as if they were an employee of the end client.

Prior to the reforms, it was the individual contractor’s obligation to determine the nature of their working relationships for tax purposes – but HMRC found that it was too easy for contractors to claim non-employment relationships to avoid paying the correct tax.

In 2017, HMRC made public authorities the responsible party for determining whether IR35 rules applied when they hired contractors. Then, in 2021 (following a delay due to COVID-19), HMRC also moved the responsibility onto medium and large private businesses – the only exception being small private businesses, where responsibility remains with the contractor.

Under the reforms, IR35 tax liability is almost always the responsibility of the end client or hirer. If the IR35 rules apply, the public authority or private business must put the contractor on their payroll and apply employee taxes, including National Insurance deductions, before paying their fees.

The problem is that the reforms made clients less likely to hire contractors, as most businesses are averse to taking financial risks. Many people see the IR35 reforms as not just flawed, but having a negative impact on the UK economy, so the proposed rollback would have been welcome.

If the reversal had proceeded, contractors would once again be responsible for tax self-assessment – but this will not be happening in 2023 as many hoped.

U-turn on IR35 reform repeal

With the government in turmoil, Chancellor Hunt publicly announced his intention to scrap most of his predecessor’s proposed measures in the next fiscal statement. After Kwarteng’s mini-budget crashed the pound, the reversal aims to restore some market stability.

The IR35 reform repeal would have re-opened the door to higher levels of tax avoidance, so keeping the reforms should save money for the Treasury to better distribute to public finances. This should hopefully also restore some of the public’s confidence in the government.

There were no details about how the reform rollback would even be carried out, and no risk assessments on the impact of such measures, no public consultations or draft legislation – so completely repealing the IR35 reforms with no review of where they could be improved first was never going to work, in any case.

Though a fully detailed statement is unlikely to be shared until mid-November, the government confirmed in comments to Contractor UK that, “With or without the reforms, the underlying rules on off-payroll working are unchanged” – meaning anyone who works like an employee should still be paying similar tax to direct employees.

Will there be an IR35 review?

Completely repealing legislation with the magnitude of IR35 with no consultation at all would be unheard of, going against existing policy procedures and potentially establishing a dangerous precedent for other types of legislation.

The back-and-forth over IR35 rules could be an opportunity to carry out a thorough review instead, identifying the ongoing issues in order to address them with more effective reforms.

As per the Financial Times, multiple tax experts are urging Chancellor Hunt to review the off-payroll working rules properly and make classifying employment statuses more straightforward. If the IR35 rules stay as they are, there are fears that it could drive more self-employed workers to be taken advantage of by unregulated umbrella companies.

Previous Prime Minister Liz Truss had pledged during the leadership contest to review IR35, but has since been replaced with new Prime Minister Rishi Sunak. Unfortunately, the IR35 reform review now seems unlikely, as Sunak was the Chancellor who oversaw the reform’s introduction.

However, given enough pressure from those most affected by the IR35 rules and experts in their industries, the new Chancellor might yet take positive action towards reviewing IR35.

Do you need help with the IR35 off-payroll working rules?

Some contractors and businesses may have begun preparations for the reform rollback when it was slated to come into force next April, but as things currently stand, there are no changes to IR35.

The responsibility for determining the status of a working relationship with contractors still remains with public authorities and medium to large private businesses, as per the 2017 and 2021 reforms.

Guidance on the current and ongoing IR35 rules can be found on the government website. These rules may affect you if you are a worker providing services through an intermediary (e.g. your own private company), a client receiving services from a worker through an intermediary, or an agency that provides workers’ services through their own intermediary.

Should you need professional assistance with accounting or payroll, or you would benefit from tax consultancy services, please reach out to us at GBAC, accountants in Leeds, not just Barnsley. You can call our accountants in Barnsley or send an email, and we’ll gladly discuss our services with you.