What is going on with IR35

Written by Leigh Foster

While the decrease in National Insurance contributions and repeal of the health and social care levy had been widely spoken about, one of the most surprising changes in the recent mini-budget was the complete reversal of the off-payroll working rules.

These rules make businesses accountable for determining if workers providing their services through personal service companies (PSCs) would have been employees if they provided their services directly. If so, the business must pay tax and NIC as if they were employees.

In August this year, the new Prime Minister indicated that there would be a review of the IR35 rules. However, without warning, the Chancellor announced the entire repeal of the 2017 reforms - which apply IR35 to the public sector - and the 2021 reforms - which extended the rules to the private sector – with effect from 6 April 2023. As a result, only the original IR35 rules from 2000 would remain in place.

What did the original IR35 rules require?

Tax legislation introduced in 2000, commonly known as IR35, was designed to reduce the disparity between the amount of tax paid by people providing their services through an intermediary and direct employee. Under the original IR35 rules, the contractor's PSC had to account to HMRC for tax and NICs if the contractor would have been regarded as an employee of the client in the absence of the PSC.

Under the rules, it was the contractor’s responsibility to make this determination. Given the consequences a determination has on the contractor, there was a strong motive to reject a characterisation of deemed employment.

How were the original IR35 rules reformed in 2017 and 2021?

The off-payroll working reforms were designed to combat widespread non-compliance with the original IR35 rules. They did this by shifting responsibility for assessing whether a contract resembles self-employment or employment from the contractor to the end client. Yet, the rules have been widely criticised as overly complex and onerous.

However, with Kwasi Kwarteng being relieved of his position as Chancellor of the Exchequer and being replaced by Jeremy Hunt, the decision to repeal the IR35 rules in the mini-budget was controversially reversed by Jeremy Hunt on 17th October 2022 meaning the changes made in 2017 and 2021 will remain.

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