On the 23rd of September 2022, UK Chancellor Kwasi Kwarteng announced his plans to repeal the 2017 and 2021 IR35 reforms. This was an unexpected move.
If you don’t know what IR35 is (also known as the Off-Payroll Working Rules) it was created to assess whether someone is a genuine contractor for the purposes of paying tax rather than a “disguised” employee. HMRC introduced IR35 for the purposes of tackling “disguised employment” to ensure that contractors were not taking advantage of the tax efficiency that comes with working through their own limited company, when for all intents and purposes, they would be deemed an employee were it not for the fact they were working through their company.
In its simplest form, IR35 is an employment status test for tax.
Inside or Outside IR35 –
- Inside IR35- if your role is deemed “INSIDE IR35” your assignment points towards employment. Therefore, for HMRC purposes, you are viewed as an employee and will be subject to income tax and national insurance deductions in the same way an employee of the organisation would be.
- Outside IR35- if your role is deemed “OUTSIDE IR35” your assignment points towards self-employment. Thus, you can enjoy the potential tax efficiency that comes with self-employment.
The original changes caused major disruption to the UK’s private sector flexible labour market back in April 2021, but they were brought in to shift the responsibility for assessing a workers IR35 status from the individual PSC, to the business or organisation engaging the worker. The Government felt too many workers engaged via an intermediary, were not being treated as employees when they should have been. The rationale behind the changes was that engaging organisations and businesses in this decision-making process would more likely result in an effective employment status assessment on PSC workers.
From April 2023 however, workers across the UK providing services via an intermediary such as a PSC will once again take responsibility for determining their IR35 status. Individuals providing services through a PSC will be responsible for determining their own status and ensuring the right amount of tax and national insurance contributions are being paid.
So why repeal the reforms on IR35 legislation?
The government has stated that reversing the changes will “free up time and money for businesses that engage contractors, that could be put towards other priorities. The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules”. Many concerns have been raised since the changes came into force in 2017 and 2021 that businesses were either, avoiding engaging contractors via a PSC or were blanket assessing contractors as inside IR35. Therefore, on face value this recent announcement is good news for contractors. Organisations will be able to hire contractors via a PSC without the risk of non-compliance. Penny Simmons Legal Director at Pinsent Masons stated, “Businesses will likely welcome the chancellor’s announcement that the government will repeal changes to the IR35 rules that have created significant compliance and tax risks for businesses,”
It is important however that contractors and businesses don’t rush back to engage services via PSCs as the repeal of the reforms to IR35 does not mean the end of them altogether. Simmons added: “It’s just that contractors will once again be responsible for compliance and payment of tax. Alongside a multitude of other considerations, it is important to remember that existing HMRC status determinations may linger beyond April 2023, and therefore it may well be easier for HMRC to pursue contractors using status determination statements that would have been made under the previous regime. It will therefore be harder for contractors to create a defence and penalties will be applicable should they determine the status of the role to be different to the original determination. Furthermore, businesses will remain exposed to tax risk by virtue of other tax rules especially if they pay contractors off-payroll when they know that the contractors should be taxed as if they were employees.
It will be interesting to see closer to April next year how the rules will be rolled out and the impact it has on the UK flexible workforce.
For more information contact Antonia Klein on 020 7092 8000