Tax cuts dominated news bulletins in the post-analysis of the Chancellor’s, Kwasi Kwarteng, Mini Budget 2022. However, changes to IR35 rules slipped through the backdoor despite its potential huge impact. With IR35 rules a little over a year old for within the private sector (coming into force in April 2021), it was quite a shock that the Chancellor chose to reform off-payroll rules.
Even the most skilled predictors and optimists were stunned by reforms to IR35. This was even more so within the labour market, who largely are still getting used to its rules and regulations. From construction to IT, catering to professional services, IR35’s reach stretches right across UK trade. As such, IR35 regulations affect contractors, freelancers, agencies, as well as limited companies.
We break down the new changes to IR35 and why control is being handed to the worker rather than the fee payer, as well as its impact and future within the tax system…
What Is IR35 & The Off-Payroll Tax?
IR35 is a term used to describe a set of tax regulations designed to tackle tax avoidance by companies and their employers. It relates to companies hiring freelance workers or contractors. These workers charge the company in question for services supplied through an intermediary, usually a limited company or an agency.
The IR35 determines whether these contractors are in fact employees who essentially ‘work’ for the company. Alternatively, they may be providing their services illegally by avoiding income tax and national insurance contributions. These are known as ‘deemed employees’, who IR35 is designed to expose the avoidance of tax payments through a limited company.
On April 1st 2021, the new Off-Payroll Tax scheme came into force for medium and large-sized private sector clients. The public sector had already followed these rules since April 2017. These changes saw the responsibility for determining the IR35 status of contractors pass over to their end client. As part of the reform, the liability also shifted from the contractor to the fee-paying party in the supply chain. As well as this, companies were also required to pay employment taxes on top of fees paid to the contractor.
Since its inception within the private sector, many analysts have labelled IR35 as a disaster. This is largely because IR35 was said to heavily hinder the UK’s flexible workforce. Businesses found it extremely challenging to ensure compliance, with confusion around the scheme causing major issues nationally.
What Are The New Changes To IR35 & Off-Payroll?
As announced by the Chancellor on Friday 23rd September 2022, the government intends to repeal the off-payroll working reforms. From April 2023, contractors will once again be responsible for ensuring their IR35 compliance. They will also be tasked with paying the appropriate amount of tax and NICs under IR35. Furthermore, it also means issues resulting from IR35 reform should effectively no longer exist. Self-employed contractors will be handed back the power to determine their employment status. Businesses will soon also be able to hire contractors without fear of being punished for non-compliance by HMRC.
IR35 related mistakes were said to have cost businesses upwards of £250 million. As well as this, large sums of money were spent on logistics around changing to IR35 over the past year. Despite many businesses welcoming this reversal to off-payroll, it seems like a huge clanger dropped by the government.
What Is The Feeling Around The IR35 U-Turn?
Nordens’ Tax Manager, Adam Truluck believes, “The removal of IR35 is a huge change to come out of the recent budget. Many of the changes have been met with a lot of criticism but this one has been met with welcome arms by all businesses. It frees up sub-contractors to self-assess their own filing requirements under IR35. It also frees up contractors’ resources, which were previously taken up assessing their subcontractors.”
Adam goes on to say, “Many large companies would usually take a blanket rule on all sub-contractors and force them into PAYE in order to secure their own position. This led to many businesses who did not fall under IR35 being caught up and forced onto payroll. With the removal of IR35 this has freed up more potential tax planning opportunities, saving businesses a considerable amount of tax. This I think is needed by most with the uncertainty of the current economic climate.”
We hope this has outlined to you the new reforms to IR35 coming into effect in April 2023, and how they will affect your business. If there’s anything mentioned, or you wish to know more about IR35 rules, then please do not hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.