Repeal of IR35 - Proposed changes to the off-payroll working rules

At the new Chancellor’s mini-budget in September, a number of regulatory reform announcements were made, one of them being a change to the off-payroll working rules, also known as IR35.

What is changing in the law

From 6 April 2023, contractors who provide their services via an intermediary, such as a personal service company, will be responsible for determining their own employment status and paying the relevant tax and NICs.

The reforms that were enacted in 2017 and 2021, required the end client who engages the contractor, to make a decision about the employment status of the individual contracted to provide a service. 

Under IR35, the end client or the recruitment agency was also responsible for making the appropriate deductions for tax. These reforms were met with a great deal of challenge from self-employed contractors and businesses who engage self-employed contractors on a flexible basis as the rules put the onus on businesses to ensure compliance. The aim of the legislation was to stop the promotion of disguised remuneration schemes however, this in turn meant that there was less flexibility for contractors and businesses with a number of contractors becoming employees of the end user. 

The Government announcement

Last week’s announcement confirmed that the government intends to repeal the 2017 and 2021 reforms and to simplify IR35 which many businesses feel has added unnecessary complexity and costs to working relationships in the last few years.  

The proposed changes will mean that contractors will be responsible for determining their own employment status and for meeting any liability for tax as opposed to the client who engages them. This is a welcome change for businesses who engage contractors and also the UK’s flexible and skilled workforce. 

It is important to note that although the onus for determining employment status and tax payable will become the responsibility of the contractor further to the incoming changes to IR35, businesses will still need to ensure compliance where they engage contractors off-payroll when they know they should be treated as employees and taxed accordingly, otherwise the business may be exposed to legal risk and penalties. 

What to take away

Businesses and contractors need to be alert to the risks and carefully consider the employment status of the contractor at the outset of the working relationship, this is especially so given the potential liabilities which can arise from an incorrect employment status determination.