From cancelling the recent National Insurance increase to cutting the basic rate of income tax, Chancellor Kwasi Kwarteng’s recent mini budget contained quite a few surprises as part of Liz Truss’s government’s new ‘growth agenda’. Of all the announcements, however, without a doubt one of the most welcome was the U-turn on the IR35 off-payroll working rules introduced in 2017 and 2021. Despite this, employers and interim workers alike have plenty of questions: what exactly does the new IR35 ruling mean, and who is impacted by the changes? What happens between now and April? In this blog post, we’ll be answering all these questions and more.
The History Of IR35, and IR35 Reform
IR35 was implemented as official tax legislation back in the year 2000 to clamp down on the growing use of one-man-band limited companies to provide professional services to clients effectively as an employee, whilst still enjoying the tax benefits afforded them by a corporate structure. Despite some fierce opposition to the legislation, rules requiring contract workers to provide their services via a personal service company became law via the Finance Act 2000 and have remained on the statute book ever since. Under these rules, contractors were responsible for assessing their own status and liable for the associated tax.
How Were The Original IR35 Rules Reformed In 2017 And 2021?
The off-payroll working rules (Chapter 10 of the Income Earnings and Pensions Act) were introduced into the public sector in 2017 and extended to the private sector in 2021 for medium and large companies, and were designed to combat widespread non-compliance with the original rules. They did this by shifting responsibility for assessing whether a contract resembles self-employment from the contractor and to the end client. This meant that companies could either:
- Choose not to engage contractors at all.
- Engage contractors via third party ‘umbrella’ companies who were responsible for the determination.
- Label all contractors as ‘inside IR35’ out of an abundance of caution.
- Work to determine a potential employee’s status either via the government CEST tool or by using a third-party provider’s tool.
The challenges that followed IR35 reform saw some contractors exit the UK talent pool altogether, whilst some requested higher day rates to make up for remuneration lost by working ‘inside IR35’. Furthermore, major challenges were caused by the fact that even the government’s own CEST tool failed to deliver a result approximately 21% of the time. It’s hardly surprising, then, that plenty of companies struggled to make accurate determinations – including the Home Office and Department of Work and Pensions!
What’s The Situation Now?
In the mini budget, the chancellor announced the repeal of the 2017 and 2021 changes to IR35, issuing the following statement:
“The 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) will be repealed from 6 April 2023. From this date, workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance contributions. This 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”.
This places the responsibility for the determination of IR35 and the tax liability back with the contractor and away from the end client. This means that businesses will be entitled to take a contractors’ assessment of their status at face value.