IR35 reversal reversed!

The new Chancellor, Jeremy Hunt, has confirmed that planned changes to IR35 will not be going ahead. End users in the public sector and large and medium sized end users in the private sector will continue to be obliged to apply IR35 to any contractors providing their labour via their own intermediary, such as a personal services company or partnership (“PSC”).

IR35 is a tax anti-avoidance rule designed to combat “disguised employment”. IR35 applies when the contractor would be an employee (or officeholder) for tax purposes if they were hired directly by the end-user. If IR35 applies, PAYE and NICs must be operated in respect of the fees paid to the PSC.

Under the original IR35 rules, the contractor was responsible for assessing whether IR35 applied and, if so, operating PAYE/NICs. The rules were changed for the public sector from April 2017 and for large and medium-sized private sector businesses from April 2021. Under those changes, the responsibility for assessing whether IR35 applies moved from the contractor to the end-user. If the end-user determined that IR35 applies, the responsibility for operating PAYE and NICs moved from the PSC to the “fee payer” – that is, generally the entity which contracts directly with and pays the PSC.

The September 2022 mini-budget said that these changes would be reversed. The then Chancellor Kwasi Kwarteng proposed that, with effect from 6 April 2023, irrespective of whether the contractor was working in the private or public sector, the contractor would once again be responsible for determining their own employment status and paying the appropriate amount of tax and NICs under IR35.

Mr Hunt has now confirmed that this change will not take effect and the status quo will continue after April 2023.

This means that the time and money spent by businesses on preparing for the original IR35 changes will not have been wasted, although a reversal of IR35 may well have reduced overall business costs. Due to the rapid U-turn, hopefully businesses will not have spent much time planning for the change. The IR35 situation is an example of wider confusion about what is happening with proposed changes to employment law, as the long-promised Employment Bill seems to have vanished and key new laws such as regulation of tips are being introduced by Private Member’s Bills. Although we would usually advise businesses to act quickly in response to government announcements about employment and tax regulation, in current times it may be prudent to wait a few weeks!

For more information about other reversals to the mini-budget see Matthew Rowbotham’s article here.