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Government u-turns on plans to scrap IR35 reforms in public and private sector from April 2023

Chancellor Jeremy Hunt confirms that the planned repeal of the IR35 reforms in the public and private sector is cancelled

Chancellor Jeremy Hunt has confirmed that the planned repeal of the IR35 reforms in the public and private sector announced in last month’s controversial mini-budget will no longer happen in April 2023.

The repeal, announced by his predecessor Kwasi Kwarteng on Friday 23 September, had been warmly welcomed by the contracting community, as the reforms have been blamed for stifling the dynamism of the IT sector by making it harder, more costly and time-prohibitive for enterprises to take on flexible labour.

However, the repeal is now one of a number of tax cuts and policies announced in the mini-budget the government is planning to row back on in the wake of the economic and political turmoil Kwarteng’s first and only fiscal statement caused.

Following Kwarteng’s mini-budget, the value of the pound fell to an all-time low, with the International Monetary Fund and the Bank of England criticising the proposed package of tax cuts, with Kwarteng and prime minister Liz Truss soon finding themselves under pressure to amend their plans.

In response, 10 days after the mini-budget was first announced, the government announced a u-turn on its plans to abolish the 45p rate of income tax for individuals earning more than £150,000.

On Friday 14 October, Truss confirmed the plan to scrap the previous government’s planned increase in corporation tax will also not go ahead. On the same day, it was confirmed that Kwarteng would be leaving his post as chancellor, with Hunt announced as his successor the following day. 

To mark the start of his tenure, Hunt issued an emergency statement today, which is when news that the repeal will no longer go ahead was made public, before the publication of his medium-term fiscal plan on 31 October 2022.

What are the IR35 reforms?

The IR35 reforms were first introduced to the public sector in April 2017 before being extended to medium-to-large private sector firms in April 2021, and saw contractors cede control for determining how they should be taxed to the end-user organisations that engaged them.

Previously, contractors were able to self-declare whether the work they do, and how it is performed, meant their engagements were in or out of scope of the IR35 rules, but – according to HM Revenue & Customs (HMRC) – this system was being abused by some to deliberately misclassify themselves as working outside IR35 to artificially minimise the amount of tax they pay.

This is because engagements that were classified as being inside IR35 meant the contractors concerned would be treated as employees for tax purposes and would be expected to make the same pay-as-you-earn (PAYE) and NICs as permanent employees.

The roll-out of the changes to both public and private sectors brought about huge amounts of upheaval for IT contractors as some end-hirers sought to side-step the additional administrative burden this shift in responsibility put on them by introducing contractor hiring bans.

Other organisations decided to issue blanket determinations, whereby all contractors were deemed to be working inside IR35 as a means of ensuring compliance and to reduce the risk of being saddled with a sizeable tax bill later down the line for incorrectly assessing the tax status of their contractors.

To this point, several central government departments have found themselves subject to compliance reviews by HMRC that have seen them hit with penalties and multimillion-pound tax bills for making IR35 status determination errors.

Joanne Thorne, technical compliance manager at contractor-focused online accountants SJD Accountancy, slammed the decision for “snatching away” the “glimmer of hope” that removing the reforms would eradicate some of the barriers contractors face when trying to find work.

This is because, in the wake of the reforms coming into force in the public and private sector in 2017 and 2021, respectively, many end-user organisation introduced hiring bans that prohibited the engagement of limited company contractors.

“The self-employed are left at the bottom of the pile once more following the chancellor’s emergency statement this morning. The announcement of a reversal of the IR35 repeal from Kwasi Kwarteng’s mini-budget offered a glimmer of hope to contractors, which has been snatched away just as quickly as it was given,” said Thorpe.

“It would likely have been difficult for the government to quantify the benefits of the repeal, so it’s shocking to see that IR35 has been included in further u-turns today. This is damaging to the gig economy and will do little to help stabilise the economy at the moment.”

Thorpe added: “The lack of confidence in Liz Truss’s government is plain to see, and this ‘will they, won’t they?’ approach offers very little comfort for the self-employed who have already endured a turbulent few years.”

Dave Chaplin, CEO of tax compliance firm IR35 Shield, echoed Thorpe’s sentiments, and said u-turning on the decision to repeal the reforms is a mistake.

“Repealing off-payroll would have returned an essential level of certainty to contract transactions in the market economy, leading to economic growth. Instead, off-payroll will continue to cause significant harm to the self-employed, major businesses, the government, and the economy,” he said.

“While we agree that tax avoidance measures are sensible, the off-payroll rules over-extended, causing genuinely self-employed contractors to lose their rights to being their own boss.

“The Conservatives u-turn on the repeal has thrown around half of the genuinely self-employed contractors under the bus, and likely kissed goodbye to their success at the next General Election,” he added.

Julia Kermode, founder of independent worker consultancy IWORK, said the government’s flip-flopping on the reforms and other policies risks leaving millions of contractors in limbo, unsure of whether they can pay their bills.

“Rowing back on the IR35 reform repeal deals a major blow to freelancers and contractors. Given IR35 reform makes working self-employed more difficult, it contradicts the government’s latest plans to help those on benefits and at college work for themselves,” she said.

“And while backtracking on the promise to scrap the 45p income tax rate was the right thing to do, basic rate income taxpayers – who need help more than ever – have had their hopes dashed once more.

“With yet another fiscal statement pencilled in for 31 October, when will it end? What we all desperately need – businesses, workers and even MPs – is stability, clarity and a robust plan of action so we can all get on with things,” she added.

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