Chancellor announces that IR35 reform will be scrapped

IR35 reform in both the private and public sectors is to be repealed, the Chancellor announced in the mini Budget, held on Friday 23rd September.

This surprise development made up just one of many welcome tax changes, as Liz Truss’s new-look government promised to start “a new era” and unleash the potential of UK business.

Focusing on IR35, new Chancellor Kwasi Kwarteng spoke of the need for “tax simplification”, before saying that “we can also simplify the IR35 rules – and we will.”

He then added: “In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.”

“So… we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”

Needless to say, the unexpected announcement has been welcomed across the contracting industry, with recruitment agencies and end-clients also quick to praise the decision.

IR35 lobbying body, IPSE, for instance, described the news as a “watershed moment”.

Andy Chamberlain, Director of Policy at the membership association, said: “It is with huge relief that we welcome this dramatic shift in government thinking”.

He added that it “will be a tremendous boost to thousands of contractors who have been unfairly penalised by these damaging rules.”

What happens now?

As detailed in the government’s policy document, ‘The Growth Plan 2022’, reform in both the public and private sectors will remain in place until 6th April 2023. In other words, nothing will change until then.

Contractors engaged by public sector bodies or by medium or large businesses are neither responsible for determining their IR35 status nor liable, in the event of non-compliance.

Until the reform is reversed, as a contractor, your client will continue to administer IR35.

However, as of April 2023, the responsibility for assessing IR35 status (along with the liability) will transfer back to the contractor.

What does this mean?

Above all else, it means that contractors will be in a position to judge if they provide their service to clients in a manner reflective of self-employment or in a way that reflects employment.

The huge problem of contractors being left with very little option but to operate inside IR35, via umbrella companies or become employees by end-clients is unlikely to continue for much longer.

Hand in hand with this change is the shifting of the liability, which means HMRC will scrutinise the compliance of contractors, rather than businesses. It therefore goes without saying that being confident in your IR35 status and protected against the risks of a tax investigation will be key.

Mini Budget delivers on many fronts

IR35 aside, the mini Budget unveiled a raft of tax cuts which will come as a boost to freelancers and contractors operating through their own limited companies.

Liz Truss had promised to lead a low-tax government and at the first opportunity, she – along with her new Chancellor – delivered.

The eye-catching tax cuts include:

• Corporation tax: shelving plans to increase Corporation Tax from 19 to 25% next April.
• Dividend tax: from April 2023, reversing the 1.25 percentage point increase also rolled out this year.
• Income tax: from April 2023, a cut in the basic rate of income tax, to 19%.
• Higher rate income tax: from April 2023, creating one single high rate income tax (40%)
• National insurance: from November, scrapping the 1.25 percentage point increase introduced earlier this year.