A government in crisis scraps the IR35 reform, On Monday, October 17, 2022, the repeal of the IR35 reform was abandoned. a foolish, rash decision by a newly established administration in a precarious situation,
It happens less than a month after the now-former chancellor Kwasi Kwarteng made the shocking announcement that the government’s so-called Mini-Budget would remove the restrictions governing off-payroll working in both the public and commercial sectors
However, today’s contractors are in shock. Prime Minister Liz Truss’ Mini-Budget, which Kwarteng presented, has been virtually destroyed by Jeremy Hunt, the fourth chancellor of the exchequer in as many months.
Hunt depressingly confirmed contractors’ worst concerns by announcing that the off-payroll regulations from 2017 and 2021 will remain in place. This comes after Hunt reversed course on the intention to postpone raising the corporation tax rate for next year and eliminating the 45p income tax rate.
The IR35 reversal was welcomed by the industry
Industry welcomed the anticipated rollback of IR35 changes that Kwasi Kwarteng outlined in his mini budget on September 23. Many in the contracting sector saw it as an opportunity to cut costs and red tape. It also made it possible to reconnect with former employees who had left the industry and allayed concerns about hiring flexible labour, particularly in times of labour shortages. In general, business felt that the government was attentive to their demands, not simply those related to building.
Businesses anticipated that starting in April 2023, individuals who work with contractors would no longer be required to do employment status analyses or, depending on the findings, operate PAYE. This would have prevented any potential liability resulting from mistakes in the review process, such as risks being returned to the contractors themselves, and would have immediately saved employers’ National Insurance.
The topic of work status has long been contentious, in large part because there is no legal definition of what counts as employment for tax reasons. As a result, several cases have ended up in court. Even HMRC’s Check Employment Status for Tax (CEST) tool has come under scrutiny for the accuracy of its findings and the fact that it continues to ignore the idea of “mutuality of obligation,” which is seen as a crucial criterion in determining employment status. Additionally, it’s estimated that about a fifth of CEST tests still return a “unable to determine” result.
It is disappointing to see the abandonment of the IR35 reforms, even though many of the other U-turn announcements on Monday were expected given the chaos and market turmoil caused by the so-called mini budget. Kwasi Kwarteng has stated that the IR35 reforms imposed are a “unnecessary complexity and cost for many businesses.”
What Jeremy Hunt said on IR35 reversal
Almost all of the tax reforms proposed in the growth plan three weeks ago that have not started parliamentary legislation, according to Hunt’s mid-morning, broadcast announcement, would not be implemented. This includes the IR35 reform’s repeal. But the chancellor made it clear that the government is “no longer proceeding with the…reversal of off-payroll working changes,” putting an end to any lingering doubts.
Given that Hunt supported Rishi Sunak’s leadership campaign, the decision to scrap the repeal of the IR35 legislation isn’t entirely unexpected. Sunak was the chancellor when similar adjustments were implemented in the private sector in April 2021, and contractors will no likely recall this.
Additionally, rumours of a U-turn on the IR35 repeal have been growing. The newly appointed chancellor was the subject of growing rumours over the weekend that she would renege on the government’s promise to undo the modifications.
Shambolic nature of decision-making in government
For everyone working for themselves, whether they use a limited company and are therefore affected by IR35 or work as sole traders and aren’t, the shambolic character of current government decision-making has created such an uncertain situation.
What transpires, then?
For contractors who work for limited companies, it’s “as you were.”
That is, unless you are employed by a business that meets the definition of “small,” your end-client will continue to determine your IR35 status.
IR35 liability going forward?
The fee-paying party will also be responsible for non-compliance, which is normally the recruitment agency where one is engaged, provided that all legal requirements have been followed throughout the supply chain.
It’s a major setback for contractors, many of whom had been forced to work on the payroll by risk-averse customers, whether inside IR35, through an umbrella business, or even as permanent employees.
The government that was formerly referred to as the “party of small business” is to blame for the IR35 policy breakdown. The self-employed and entrepreneurs, who make significant annual contributions to the UK economy in the billions, are the smallest contributors to the business community, and this party was created to represent their best interests.
The so-called party of business simply chose wrong
The government’s decision to reverse a number of significant tax cuts announced last month was the least controversial, while I can appreciate their need to calm the markets and back off. In actuality, it was just, rational, and ultimately sensible from both a moral and financial standpoint. The same is true of the reversal and the way it has all been handled; it is nearly absurd and will undoubtedly cause harm.
The UK stands to lose out economically in particular if off-payroll reform is not repealed. Consider the countless contractors who departed the industry as a direct result of the IR35 reform, whether they did so by relocating abroad or even by retiring. These limited corporations, which once made significant contributions to the national coffers, will now make little to no money for the Treasury.
Additionally, this move indicates that companies that rely on these individuals must continue to prioritise their IR35 compliance, as has been the case since April 6, 2021 in the private sector and April 6, 2017 in the public sector.
Read more: I need to close my IR35 company
Little comfort, but it’s ‘as you were’ for us too
Given Mr. Hunt’s backlash and the fact that the current IR35 plot twist is still unresolved, I assume there isn’t much I can do to reassure contractors at this point. However, the reality is that IR35 is being understood by more businesses.
By this, I mean that clients are increasingly allowing genuinely independent contractors to work without interference from this regulation. And as has been our goal since since these polarising laws were initially implemented in 2000, we’ll keep pushing forward to make sure that companies manage IR35 in a fair and compliant way.
Worried that the scrapping of I35 will affect your business, call us today or complete an online enquiry.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.