Where next for IR35?

The Chancellor has announced that plans to repeal the Off-payroll legislation which was supposed to reform IR35 will be scrapped, sparking criticism from employers.

The previous Chancellor Kwasi Kwarteng had announced that from April 2023, contractors would again be responsible for assessing their own tax rather than the employers they work for, but this has been reversed by Jeremy Hunt.

The IR35 reforms, which rolled into the public and private sectors in 2017 and 2021 respectively, have been deeply unpopular with contractors, with many considering closing their businesses or seeking work outside the UK as a result. A report earlier this year by Kingsbridge Contractor Insurance found that over 70% of businesses and recruiters had seen a reduction in their limited company Personal Service Company contractor workforce since 2021 when the legislation was extended to the private sector after it was first introduced in the public sector.

The problem with the legislation is that it forces employers to make a decision on the often complex issue of employment status and led to many companies relying on CEST [Check Employment Status for Tax – HMRC’s tool for defining tax status whose accuracy has been questioned], adopting blanket bans on contractors or working with umbrella companies through fear of risk.

Criticism

It is not only contractors who have been critical of the reforms. Parliament’s Public Accounts Committee also raised several concerns earlier this year about how the reforms – brought in to address disguised employment – worked in practice and called for HMRC to demonstrate that the system “can operate effectively and fairly in the real world, and investigate whether the costs and unintended consequences are proportionate to the additional tax revenue which the reforms raise”.

The change announced in Kwasi Kwarteng’s mini-budget went further than many campaigners were anticipating by repealing the reforms, but that has all been reversed now.

Despite initial enthusiasm at the time of the controversial mini-budget announcement, however, some experts warned that there could still be trouble ahead due to ongoing turbulence and, in any event, they said that the original IR35 legislation was still very complex and that some employers may have already been discouraged from using contractors.

Writing for Contractor UK at the time, tax lawyer Rebecca Seeley Harris, author of CEST Explained and the founder ReLegal Consulting, said: “My recommendation is to avoid making any knee-jerk reactions. Remember, there should be a full Budget in November 2022 and while it pains me to say it, things may change (again). After all, chancellor Kwarteng moved to repeal the April 2017 and April 2021 IR35 reforms without any consultation which is very unusual. With HMRC no doubt desperate to recoup the incoming billions lost through his pledged action, nasty surprises simply can’t be ruled out.”

Responding to the latest change of direction, Tania Bowers, Global Public Policy Director from the Association of Professional Staffing Companies (APSCo), said the change of direction had exacerbated instability.

She stated: “The Off Payroll repeal arguably had no impact on the market fall we saw since the Mini Budget which demonstrates that the Government has simply reversed everything from the initial announcement that it could in what we feel is a panicked response to economic troubles. With so much instability at the moment, the country needs evidence that growth is on the agenda and that includes sustainable growth of the labour market as much as the wider business landscape.

“As the country continues to face significant struggles, having access to a flexible labour market is crucial. Following the roll out of IR35 into the private sector, we saw reports of the country losing highly skilled contract professionals as they faced no choice but to take a full-time role… Our view that this regulation is not fit for purpose for the modern flexible workforce needs of today remains and we will continue our efforts to address this issue with Government bodies once again. While we understand that action was needed to bolster the UK market following the initial announcement of the Mini Budget, the on-going instability is detrimental to the growth plan that the Truss administration aims to deliver.”

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