Top 10 reasons why IR35 reform repeal isn’t plain sailing for contractors (2023)

As the contractor sector and beyond knows by now, on Friday September 23rd 2022, chancellor Kwasi Kwarteng made a very significant announcement about IR35 reform in his Mini-Budget 2022.

But what seems to be lesser known and certainly is being less appreciated than it ought to be, is precisely what he announced, writes tax lawyer Rebecca Seeley Harris, author of CEST Explained and the founder ReLegal Consulting.

Mr Kwarteng announced the government’s intention to repeal the Off-Payroll Working (‘OPW’) rules which currently govern the public sector (since April 6th 2017) and the private sector (since April 6th 2021). These rules, Mr Kwarteng said, will be repealed from April 6th 2023.

However, this promised repeal of the OPW rules -- also known as IR35 reform – has been wrongly reported by many outlets to be ‘The Repeal of IR35,’ which is quite wrong because IR35, the Intermediaries legislation (found at Chapter 8 ITEPA 2003), is what we will all be left with from 06.04.23.

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Whereas this announcement by the Liz Truss-led government does seem like good news, and indeed it is a positive development for the organisations that engage contractors (‘clients’), I don’t believe it is going to be plain sailing for contractors. Here are my top 10 reasons why:

1. Off-Payroll Working reforms are in place for another 7 months

The OPW rules contained in Chapter 10 ITEPA 2003, will remain in force until April 6th 2023. And so up until that time, the framework is still very much alive and very much enforceable.

Although for the private sector the announced repeal of the OPW rules means they will only be in place for a total of two years by the times they are revoked, in the public sector, the rules will have been in place for a total of six years (since their April 2017 introduction). Therefore, in both sectors, clients are unlikely to abandon their compliance procedures and processes, partly because HMRC will still be able to investigate any wrongdoing under the OPW framework for potentially up to six years -- if there was ‘carelessness.’

2. It all hinges on the Finance Act

The OPW rules will only come off the statute books if they are contained in the next Finance Act. But we have a very unstable economy at present and the new chancellor’s Mini-Budget which contained the pledge to repeal the OPW rules has not been well received by the markets. So, at the time of writing, I believe anything could happen between now and April 2023 due to the economic volatility and unpopularity of the Mini-Budget, including in quarters which the government is relying on to get its contents passed into law.

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3. The devil you know, is still devilish

The Intermediaries legislation (otherwise known as IR35) will replace the OPW rules.

IR35 has already still been in place since 06.04.21 for those limited company contractors who worked with “small” businesses. And of course it was in place in the private sector up until April 6th 2021. Keep in mind, this is legislation that is so complex and divisive that people complained about it and lobbied against it almost continually for 21 years. So remember that although IR35 seems better than the OPW framework, it is still a significant burden on the contractor.

4. PSC bans. Too long a way back, perhaps

Many organisations simply decided that they wouldn’t work with PSCs anymore as a result of the OPW rules. Often, this decision was not a non-compliant ‘blanket ban’ (i.e. every PSC determined to be inside IR35 without reasonable care taken by the client in that assessment). It was often purely a business decision. As such, these organisations especially those for whom change takes a while to come about, may still be cautious about re-engaging PSCs in the supply chain. My feeling is that it will be market forces that dictate whether organisations with PSC bans in place, start to use PSCs again.

5. Status Determination Statement Amnesty?

At this stage, it is unclear how HMRC will deal with the Status Determination Statement (SDS) that a client has deemed as on-payroll, if the contractor comes back as off-payroll. There should be an amnesty, as there was coming into the OPW rules on previous status determinations. But HMRC has not taken the opportunity (so far) to offer such an amnesty. And some say, the prospects of such an amnesty from a taxman keeping silent on the issue look poor.

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6. Clients won’t necessarily revert to being hands-off

Under the original IR35, there was no liability on the client but, HMRC may try and find a halfway house. From April 6th 2023 however, the contractor will have the liability for the assessment and the tax. So, just as with OPW, it would be advisable for client-organisations to assist the contractor with the IR35 status determination and make sure that measures are taken to ensure compliance.

7. The self-employed anomaly

The OPW legislation does not apply to the self-employed. So, nothing has changed if you are self-employed.

However, amid the ongoing economic turbulence anddissatisfaction at the Mini-Budget, should there be a change of personnel at HM Treasury (N.B. the last chancellor lasted a not-very-grand total of only two months), this could look like an anomaly that needs to be fixed.

8. Umbrella company users -- contractors who are ‘fine as they are’ for the client?

The OPW reforms were instrumental in pushing a lot of contractors into umbrella companies. In my experience, some of these contractors should have clearly been on-payroll but, many wouldn’t have even been given the choice.

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Now, with HMRC yet to say anything substantive about IR35 enforcements post-April 6th 2023, the client may feel cautious about changing the status of the contractor from an umbrella company / on-payroll to a PSC outside IR35. That hesitancy could also come about due to employment rights reasons, not just tax. Overall however, there is likely to be a general movement in the contractor market away from umbrellas and back to PSCs.

9. Sticking their oar in

Agencies and clients now have a better awareness of employment status and IR35, so working with them on this opaque subject should hopefully be easier than some years ago. That said, parties which have learnt about OPW may want to demonstrate their grasp of the framework to you. Despite once again being the sole decision-maker of their IR35 status from April 2023, contractors might not take kindly to these suggestions or interventions from others in the supply chain.

10. Contractor assessment process 101

From April 2023, the contractor will be liable for making the assessment of their own status for tax purposes. As and when this repeal is finalised, then the contractor will need to understand the assessment process. For the sector’s many newer contractors, who perhaps have only ever used umbrella companies because they entered contracting under the OPW rules when brollies were widely seen as the default working reaction to the framework, they may find the learning curve around the IR35 assessment process particularly sharp.

Finally, my recommendation: avoid any knee-jerk

These are just ten of the very top reasons why repeal of IR35 reform / OPW rules doesn’t mean it will be plain sailing for contractors between now and April 6th 2023, and beyond.

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My recommendation – both to clients I advise but also to ContractorUK readers too -- is to avoid making any keen-jerk reactions. Remember, there should be a full Budget in November 2022 and while it pains me to say it, things may change (again). After all, chancellor Kwarteng moved to repeal the April 2017 and April 2021 IR35 reforms without any consultation which is very unusual. With HMRC no doubt desperate to recoup the incoming billions lost through his pledged action, nasty surprises simply can’t be ruled out.

FAQs

Why is IR35 repealed? ›

As part of the UK government's 'Growth Plan' outlined in September's mini-Budget, the government had planned to reverse the 2017 and 2021 changes to the off-payroll working rules (IR35) in an effort to simplify the UK tax system.

What will the end of IR35 reforms mean for contractors? ›

The repeal of these reforms from April 2023 means that end users engaging contractors via their PSC will no longer be required to carry out employment status assessments and the PSC will once again be responsible for determining whether the IR35 rules apply and, if they do, making the correct deductions for tax and ...

Will IR35 be scrapped 2022? ›

On Monday October 17th 2022 – that's today, the repeal of IR35 reform has been scrapped – a needless, short-sighted decision from a newly formed government that finds itself in crisis, writes Seb Maley, CEO of status advisory Qdos.

Will IR35 be repealed? ›

The Chancellor of the Exchequer, Jeremy Hunt, has chosen to scrap the plans to repeal the Off-payroll IR35 Reforms, which Kwasi Kwarteng previously announced in his mini-budget on 23 September 2022.

Why is IR35 unfair? ›

IR35 reforms have been 'damaging', survey finds

It is unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment.

How far back can HMRC investigate IR35? ›

HMRC has the power to go as far back as 20 years in an IR35 investigation if they believe fraud has been committed, or deliberate tax avoidance. If during the course of an investigation HMRC consider the error(s) to be honest mistakes, they're likely to go back four years.

How do I get around the new IR35 rule? ›

However the upfront answer to the original question is, you can't avoid IR35. It's the details and circumstances of your assignment and the way in which you work that will determine whether or not you are 'inside IR35' or 'outside IR35'.

Will IR35 be scrapped 2023? ›

Chancellor Jeremy Hunt has confirmed that the planned repeal of the IR35 reforms in the public and private sector announced in last month's controversial mini-budget will no longer happen in April 2023.

What are the problems with IR35? ›

IR35 is usually a threat to your income only if you are self-employed, and provide your services via a limited company. HMRC may decide that you should, in fact, be paying tax and NI contributions as if you were an employee.

How do I stay out of IR35? ›

Special Commissioners Advice To Stay Outside IR35
  1. Vary your contract hours.
  2. State the services you will provide in your contract.
  3. Don't have a fixed end date in your contract.
  4. State the work you will do in your contract renewal.
  5. Have a Substitution Clause in your contract.
  6. Set up a company website.
  7. Set up an office.

How do I stop IR35 changes? ›

1. Check your contracts. First up, one of the best ways how to avoid IR35 is to check the contracts that you currently have and make sure that they are correctly outlining the work and how it differs from an employee contract.

Is it better to be inside IR35 or outside? ›

In reality there is no real tax advantage for those caught by IR35 and you must weigh up whether the hassle of doing your own accounts, invoicing and debt collecting is worth that 5%. For those found to be “outside” of IR35 there are still real tax benefits to be enjoyed.

Does your client have the right to reject a substitute IR35? ›

A client will have the right to reject a substitute if: the contract specifies that the worker will perform the work and is silent on substitution; the hirer has an explicit right to reject a substitute; the worker can only provide a substitute from a pre-approved pool of workers.

How will IR35 changes affect me? ›

If you currently fall under IR35 rules, the change will affect you by placing all responsibility for defining your employment status and figuring out your tax liability on you. In the past, you may have worked for employers where your taxes and employment status information were handled for you.

How is IR35 going to affect contractors? ›

What impact will it have on contractors? If assessed as inside IR35, contractors will need to pay the same income tax and NICs as if they were employed. However, they still won't get any employment benefits, like paid holiday or sick leave, from the managing business.

How many contractors are caught by IR35? ›

Contractors are almost dead-cert winners of any IR35 race against HMRC as long as they stay on form.

How common are IR35 investigations? ›

Exactly how many IR35 investigations are carried out by HMRC every year is unknown. HMRC simply don't disclose those details, However, they are committed to at least 250 annually, and it's believed the actual figure could be as high as 1,000.

Is it worth contractor inside IR35? ›

Believe it or not, contractors that have secured a contract within IR35 will have additional benefits and protection. As a LTD company there are additional benefits to being inside and using an umbrella company. You will get holiday, sickness, maternity benefits etc from the umbrella company.

What triggers an HMRC investigation? ›

What triggers an investigation? HMRC claims compliance checks are usually triggered when figures submitted on a return appear to be wrong in someway. If a small company suddenly makes a large claim for VAT, or a business with a large turnover declares a very small amount of tax, this will likely be flagged-up by HMRC.

Does HMRC check your bank account? ›

HMRC has a shared service to check bank account details are correct. Other government departments and local authorities could collect your bank details from you, then check them with our shared service.

How far back can HMRC investigate a company? ›

HMRC will investigate in detail and retrospectively based on the case and how serious it is. If they suspect deliberate tax evasion, they can investigate as far as 20 years. Investigations into careless tax returns can go back 6 years and investigations into innocent errors can go backup up to 4 years.

How do you prove IR35 does not apply to you? ›

Work at home. Get your project manager to let you do some of the work at home, and see that the email record shows this is taking place. Or simply get a note saying you can work at home. The right of substitution is a very important proof of being outside IR35.

Who is exempt from IR35? ›

There's an exemption for end-clients who are 'small businesses' as defined by the Companies Act 2006 which means meeting two or more of the following criteria: Annual turnover is no more than £10.2 million. Balance sheet total is no more than £5.1 million.

Who is responsible for determining IR35 status? ›

The client is responsible for determining whether the individual would have been regarded as an employee if they were engaged directly. If the client determines the IR35 rules apply, the fee-payer is treated as the employer for the purposes of income tax and NIC.

How long can you work as a contractor before IR35? ›

How long can a contractor work for the same company without falling foul of IR35? Simply put, there is no time limit on how long you can work for one company as a contractor.

Does length of contract affect IR35? ›

No automatic IR35 capture due to duration

The good news for many contractors is that, in so far as the law is concerned, there is no period of time, or length of engagement, where a contract is automatically classed as inside the legislation -- regardless of how long it has lasted.

Has the Chancellor scrapped IR35? ›

New chancellor Jeremy Hunt has reversed the government's plan to repeal IR35 off-payroll working rules from April 2023. His predecessor Kwasi Kwarteng, who was sacked by the prime minister on Friday, announced in his mini-Budget last month that he would repeal the IR35 rules introduced in 2017 and 2021.

Are self-employed exempt from IR35? ›

The rules do not apply to those that are self-employed

The off-payroll working rules only apply to individuals who are working like employees under the current employment status tests for tax, and do not apply to the self-employed.

What happens if you break IR35? ›

HMRC's grace period for IR35 penalties ended in April. This means that for any company that 'accidentally' breaks the rules, they are likely to be liable to face penalties of up to 100% of the unpaid tax due to their inaccuracies.

How will IR35 affect my limited company? ›

It's possible to continue working through a limited company even if your current contract is deemed to be inside IR35. You'll need to ensure you pay the correct PAYE tax and National Insurance (NI) for any contract which is inside IR35 because you are, in the eyes of HMRC, an employee.

How much tax do you pay inside IR35? ›

Inside IR35 vs outside IR35

Employees pay income tax on their gross pay at either 20%, 40%, or 45% - depending on their level of earnings. Class 1 national insurance contributions are to be paid in addition. Limited companies pay 19% tax on the net profit, regardless of the level of earnings.

How do I pass an IR35 assessment? ›

To guarantee a pass you must confirm the following: That any change in 'task' throughout the contract would need to be arranged under a new contract. That the client cannot provide input as to how work is carried out. That where you carry your work out is determined either by yourself or the task itself, not the client.

Does an umbrella company avoid IR35? ›

Find out more about employment rights. If you are employed by an umbrella company, the tax rules on agency workers and off-payroll working (IR35) will not apply to you.

Can we do 2 inside IR35 contracts? ›

Each engagement is assessed individually, so you could be outside IR35 for one contract, and inside IR35 for another. You can also maintain your PSC so can be paid via your PSC for one engagement, but be paid via an umbrella company or employed for another as required.

Is umbrella inside or outside IR35? ›

IR35 and umbrella companies

Umbrella companies offer a reliable payroll service (PAYE) for contractors, freelancers and temporary workers who find themselves inside IR35. If you decide to use an umbrella company, you will not have to worry about IR35 because you'll be paid like a permanent member of staff (PAYE).

What is IR35 for Dummies? ›

IR35 explained in layman's terms

IR35 is a piece of UK tax legislation. It's designed to close a loophole in the tax system where workers could use the setup of a limited company structure in order to pay less tax.

Would the worker have to pay their substitute? ›

For substitution to be considered genuine, the limited company must remain liable for all costs associated with the substitute. When substitution occurs, the limited company must be paid as per usual by the client and the company will pay the substitute directly.

Can a sole trader be caught by IR35? ›

If you are a sole trader, you are not affected by IR35, as the legislation applies only to incorporated companies. However, the rules around designation of employment status – which are closely tied to IR35 – affect everyone who provides a service to a client including sole traders.

Does IR35 apply to everyone? ›

IR35 only affects individuals who work through their own intermediary usually a 'Personal Service Company' (PSC). A PSC is a limited company set up by an individual who will use it as a vehicle through which to provide their services to clients.

How much do I need to increase my rate inside IR35 to match my outside IR35 take home? ›

So, if you are switching to Umbrella because your contract has been deemed to be inside IR35, you might want to negotiate an uplift to your rate to ensure your take home pay is not reduced. In the examples given above, the uplift needed is between 17% and 20% of the day rate.

How much difference does IR35 make? ›

So in most cases, a contractor will lose anywhere between 15% to 20% of their take-home income. Here's a graph, showing the percentage difference for the given rates. Punchline: For tax-inefficient contractors who take all money home, the difference between Outside IR35 -> Inside IR35 (or Umbrella) is between 15-20%.

Will IR35 stop contractors? ›

The off-payroll working or IR35 rules are designed to stop contractors working as 'disguised employees', by taxing them at a rate similar to employment, and it affects all contractors who do not meet HMRC's definition of self-employed.

Why is IR35 changing? ›

The off-payroll working reforms were designed to combat widespread non-compliance with the original IR35 rules. They did this by shifting responsibility for assessing whether a contract resembles self-employment or employment from the contractor to the end client.

What's happening with IR35? ›

It was announced that the IR35 off-payroll legislation would be simplified from 6th April 2023. The rules will revert to the 2016 position with the recent 2017 & 2021 reforms, which were largely unpopular, due to be repealed.

What is the IR35 issue? ›

The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as 'IR35'.

How do I bypass IR35? ›

However the upfront answer to the original question is, you can't avoid IR35. It's the details and circumstances of your assignment and the way in which you work that will determine whether or not you are 'inside IR35' or 'outside IR35'.

How do umbrella companies avoid IR35? ›

Umbrella companies offer a reliable payroll service (PAYE) for contractors, freelancers and temporary workers who find themselves inside IR35. If you decide to use an umbrella company, you will not have to worry about IR35 because you'll be paid like a permanent member of staff (PAYE).

How long can a contractor work for the same company UK? ›

The question of how long a contractor can work for the same company has a surprisingly simple answer. There is no maximum time limit. If a contractor and a company are both happy to continue working with each other then that's perfectly fine.

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