The chancellor sensationally announced in the mini-Budget that IR35 reform will be repealed.
I think it’s fair to say that this announcement, which made up just one of many unprecedented tax changes, has taken everyone by surprise. Even the biggest optimists would not have bet on IR35 reform being scrapped, I am sure of it.
But like reversing the incoming corporation tax rise, ditching the social care levy and the countless other tax cuts, repealing IR35 has been widely welcomed.
Reform to the IR35 legislation, which was initially introduced in 2017 in the public sector before being rolled out in the private sector in 2021, caused major disruption to the UK’s flexible labour market.
The 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.
So was scrapping the reform – and reverting back to the days of contractors determining their own IR35 status and carrying the can for non-compliance – the right thing to do?
In a word, yes. The reform, commonly referred to as the ‘off payroll working rules’, was hindering the UK’s flexible workforce, with many businesses – including multiple government departments – seemingly incapable of ensuring their compliance.
Businesses have spent vast amounts of money on this exercise. You cannot ignore this, no matter how welcome the news is. From where I stand, though, and focusing on the £250mn plus of IR35 bills issued to government departments for IR35-related mistakes, this was HMRC’s own making.
The tax office rolled out a fundamentally flawed tool for assessing IR35 status – Check Employment Status for Tax – which, rather than ensuring that firms abided by the rules, actually created problems.
By repealing IR35 reform, the government have effectively admitted that it has not worked.
On the whole, it has made working as a contractor and engaging them as a business more difficult. True, more businesses have been getting to grips with IR35 in recent months – and by this, I mean engaging genuine contractors outside IR35 – but plenty of firms have upheld contractor bans, which leave contractors with no option but to work on the payroll or have their contract cancelled.
This has come at a cost to the flexibility of the UK’s workforce. So by reversing what were short-sighted and unnecessary changes, from April 2023 businesses will no longer need to ensure their IR35 compliance. As was the case prior to IR35 reform, contractors will be handed this responsibility.
I should stress, though, that until April 2023, nothing changes. All businesses (barring those qualifying as small) remain in charge of administering IR35. Compliance needs to be a priority.
While this newly assembled government has set out its stall, it is impossible not to ask questions of the previous administrations that chose to plough on and enforce the changes despite overwhelming evidence pointing out that it was not the right thing to do.
Along with the time, energy and cost of the government rolling out the reform, businesses have spent vast amounts of money on this exercise. You cannot ignore this, no matter how welcome the news is that IR35 reform will be thrown on the scrap heap.
Why didn’t the government listen the first time around?So what now for contractors and the future of IR35?
Well, from April 2023, contractors will once again be tasked with ensuring their IR35 compliance. Along with this, it means the systemic issues resulting from IR35 reform – such as contractor bans and non-compliant blanket IR35 determinations – should no longer exist.
In theory, and after a rigorous assessment of their IR35 status, genuinely self-employed contractors will be able to operate outside IR35 without any difficulty going forward. They will, however, be the focus of IR35 investigations once again.
When the changes take effect, businesses meanwhile can engage contractors in this manner without fearing being investigated by HMRC for non-compliance.
Standing back, and to conclude, the latest twist in the tale of IR35 is one that should remove a major barrier that has held back the true potential of the UK’s flexible workforce.
Although, and to reiterate, it does beg the question – why didn’t the government listen the first time around?
Seb Maley is chief executive of Qdos
