IR35 – Plan to repeal IR35 is scraped
Following the “Mini Budget” announcements from the then-Chancellor, Kwasi Kwarteng, last month, the government has now scrapped almost all tax measures announced including the planned reversal of the IR35 reforms.
What is IR35?
HMRC introduced the off-payroll working rules (known as “IR35”), with a view of clamping down on tax avoidance and reduction whereby individuals work in a way that is similar to employees, but seek to avoid paying employee income tax and national insurance contributions (“NI”) by working through a personal service company.
When IR35 was introduced, individuals were responsible to assess whether they fell under IR35 and therefore liable to pay NI and tax on their income. HMRC research suggested that only 10% of contractors were paying the correct amount of tax and NI. Therefore in 2017 and 2021, there were reforms which moved the onus onto businesses (2021) and public authorities (2017) to undertake the IR35 assessment and decide the status of their contractors.
IR35 Proposed Changes
In September 2022, the Treasury announced reforms to the off-payroll working rules were to be scrapped from April 2023. The then-Chancellor said that in practice, the reforms to off-payroll working added unnecessary complexity and cost for many businesses. The proposal was to repeal the 2017 and 2021 reforms so that the onus for determining the tax status of contractors moved back onto workers and contractors rather than businesses or public authorities.
The change would have resulted in self-employed workers providing their service through their own companies to again be responsible for paying the appropriate amount of tax and national insurance contributions, consequently shielding organisations from HMRC enforcement.
Following the appointment of Jeremy Hunt into the role of Chancellor, he has reversed the proposed changes and IR35 rules will now remain in place. The Treasury said the U-turns would save around £32bn a year.
As it stands, businesses engaging workers and contractors should continue to apply IR35 rules and ensure they continue to keep the necessary records of their checks and the tax status determinations. IR35 applies on a contract-by-contract basis and therefore repeat contractor engagements must be kept under review.
Where it is identified there is an IR35 risk, a full assessment of the relevant individual’s employment status will need to be completed and a status determination statement issued.
Employers are reminded HMRC provides a free online tool for determining the status of contractors. HMRC will stand by that determination provided the information entered into it is accurate and remains unchanged.
If you require any advice in relation to the IR35, please contact the Employment team.