Reform of IR35 Not Going Ahead – What this means for contractors and clients
The previously announced changes to IR35 will not be going ahead, the new Chancellor of the Exchequer has announced. This means that responsibility will remain with hiring firms and intermediaries to assess whether the rules apply, rather than contractors themselves being required to make this determination.
Chancellor Jeremy Hunt announced the move in his emergency statement on 17 October. This follows previous Chancellor Kwasi Kwarteng’s announcement that IR35 rules would change from April 2023.
The proposed changes would have repealed the previous updates to IR35 introduced in April 2017 and April 2021 that made public authorities, large and medium private organisations and intermediaries responsible for deciding whether IR35 rules applied. These changes would have meant contractors themselves would have needed to determine whether they were subject to IR35 rules.
Mr Hunt’s decision to scrap the reforms means the status quo will now be maintained. This may be considered good news by some contractors concerned about the legal risk, while others might be concerned that the administrative burden of dealing with IR35 rules is putting off organisations from working with them. This is also unlikely to be welcome news for the organisations that must now continue to work out whether IR35 applies to contractors they rely on.
What is IR35?
IR35, also known as the ‘off-payroll working rules’, are UK tax rules that apply to workers who provide their services to clients through a limited company or another intermediary. The rules are intended to ensure that, where those workers would have been classed as employees if they were providing their services directly, they will pay similar Income Tax and National Insurance contributions as they would have as an employee.
The rules came into force in April 2000. The name IR35 refers to the fact that the measure was the 35th item relating to the Inland Revenue (the former name for HMRC) in the 1999 government budget.
How does IR35 work currently?
IR35 applies where the worker’s services are being provided via their own personal service company, a partnership or an individual acting as their agent. Where the rules apply, Income Tax and National Insurance contributions must be paid by the worker from the fee they receive. The organisation paying the intermediary must also pay National Insurance contributions (and the Apprenticeship Levy, if applicable).
Public sector organisations are responsible for deciding if the rules apply to contracted workers they engage through an intermediary. Medium and large organisations outside the public sector are also responsible for deciding if the rules apply. For small organisations, it is the intermediary’s responsibility to decide if IR35 rules apply.
According to the Companies Act 2006, a ‘small’ business is one that meets two or more of the following requirements:
What are the proposed benefits of reforming IR35?
For businesses, putting the onus on contractors to decide if IR35 applies would have made it quicker and easier to work with them, removing the time and cost associated with working out if IR35 rules applied. It would have also meant a lot less legal risk, as businesses would not have been held responsible if the rules were not followed correctly.
For contractors, the changes could have made working with them more attractive for businesses, resulting in more work. Of course, the downside would have been more legal risk for contractors as they would have been held responsible if they failed to correctly determine whether IR35 rules applied and ensure the correct Income Tax and National Insurance contributions were paid.
What do contractors and clients need to do about IR35?
With the IR35 reforms now dead in the water, clients must continue to work out whether the rules apply to contractors they work with, except where the client is ‘small’, in which case the intermediary is responsible.
However, it is sensible for contractors, clients and intermediaries to carry out their own IR35 due diligence, regardless of whose legal responsibility it is. This helps to reduce the risk of any legal issues and can also be essential if there is a dispute between the client, the contractor and/or the intermediary over whether IR35 applies. Having an independent IR35 contract assessment is a sensible precaution for all involved.
Speak to our employment and commercial law experts
Off-payroll working rules are not always straightforward to interpret, so it is essential to get expert legal advice to ensure you remain in compliance with all UK employment law rules.
Longmores’ employment law and commercial law experts are highly experienced, so can provide clear advice on your position and whether IR35 rules apply, protecting your business. We will be happy to carry out an IR35 contract assessment to give you independent assurance of your tax position where required.
To discuss how we can help with IR35 and any other employment law issues facing your business, please get in touch with Joint Senior Partner and Head of Commercial and Head of Employment, Richard Gvero.