Tax  

What Kwarteng’s IR35 changes mean for businesses

  • Describe what the "mini" Budget's changes to IR35 mean
  • Identify the impact on businesses
  • Explain the consequences for contractors
CPD
Approx.30min
What Kwarteng’s IR35 changes mean for businesses
(Bloomberg/Charlie Bibby)

According to the statement in the chancellor’s September 2022 Growth Plan, the repeal of the complex IR35 off-payroll working rules will “free up time and money” for businesses to engage contractors, but in a radio interview last week former UK prime minister Gordon Brown described the proposed repeals as a "tax avoidance charter".  

While widely welcomed by most businesses and contractors, what might the repeal mean in practice for UK businesses, contractors and HMRC? Will the repeal even make it into the forthcoming Finance Act in order to become law by April 6 2023? 

And will Kwasi Kwarteng’s plan, commitment to embed “tax simplification” at the heart of the tax system and be a core Treasury and HMRC priority, bring any reassurance to businesses and contractors grappling with the complex legal case law defining employment status?

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A confusing set of misnomers 

It has been widely misreported in some media that IR35 itself is being repealed. It is not. The IR35 regime was introduced by Gordon Brown when he was chancellor of the exchequer and it is still in place.

The purpose of IR35 is to ensure that individuals who are really working like employees but providing their services through their limited personal service companies (PSC) broadly pay the same tax and national insurance contributions as people who are employed directly.

Part two chapter eight of the Income Tax (Pensions & Earnings) Act 2003 – the intermediaries legislation commonly known as IR35 – placed the responsibility for assessing the true employment status of the engagement on the contractor.

If the working arrangement between the individual and client was akin to employment, that is, 'inside IR35',  then the intermediary was required to treat payments from the client for services rendered as deemed salary and deduct PAYE accordingly.

This new IR35 regime did not bring in the expected revenue and because of perceived wide-spread non-compliance, reforms were introduced in the form of the off-payroll working  (OPW) rules under chapter 10 of ITEPA.

The OPW rules shifted the liability for assessing employment status and making PAYE deductions when required onto the end-user client. The OPW rules have applied in the public sector since April 2017 and to medium to large private sector businesses with a UK connection since April 2021.

The ITEPA definition of a medium to large business is when it meets two out of the three following tests:

  • annual turnover of £10.2mn;
  • a balance sheet of more than £5.1mn; or
  • more than 50 employees.

It is these OPW reforms under chapter 10 that are being repealed. From April 6 2023 the position reverts to what it was before April 2017 (public sector) and before April 2021 (private sector.

Contractors who provide their services through their personal service company will again be solely responsible for assessing their own employment status and deducting tax and NICs from their fees if they conclude they are a deemed employee. 

A welcome development? 

Kwarteng’s promise that the repeal of the OPW rules will save businesses time and money from April 2023 onwards is a credible one. Businesses will be freed from the considerable burden of producing status determination statements (SDS), confirming what they believe the contractor’s true employment status to be and reasons for their decision.