IR35: what does the new approach mean for employers?

Gary Henderson and Andy Atwell review the implications of the chancellor’s announcement that the changes to off-payroll rules are to be scrapped

Credit: Sukanya Sitthikongsak/Getty Images

The chancellor positioned the government’s recent mini-budget as a new approach for a new era, focused on growth. In his speech, the off-payroll rules (introduced in 2017 for the public sector and in 2021 for the private sector) were described as having added unnecessary complexity and cost for many businesses. As a result, the government will repeal the changes to off-payroll rules from 6 April 2023 as part of its drive to simplify the UK tax regime. 

According to the government’s Growth Plan 2022, the repeal will, for businesses that engage contractors, free up time and money for other priorities while minimising the risk that genuinely self-employed workers are impacted by the off-payroll rules. The repeal of the off-payroll rules (often referred to as IR35), represents a significant change in direction from the government. The rules were inspired by the finding that only 10 per cent of personal service companies (PSCs) were correctly accounting for tax.

The repeal of the off-payroll rules means a return to the position pre-2017: a PSC, when engaged to provide a service by any third party in the public or private sector, will once again be responsible for determining its own worker’s status for tax purposes and accounting for any tax liabilities. No longer will organisations higher up the supply chain be saddled with these burdens. 

Many businesses will be pleased at the repeal. Organisations wanting to onboard limited company contractors at short notice were often completely wrongfooted by the administrative work needed to carry out status determination assessments and update longstanding contractor agreements, as well as the requirement to account for tax and national insurance. The drive to steer away from the off-payroll rules caused several businesses to make use of agencies. This move added to the cost of services and meant having to contend with agency worker rights, which could otherwise have been avoided.

Only time will tell if the return to the old rules will lead to a rapid rise in the use of PSCs in the private and public sector. 

There are clear benefits to the repeal for businesses that engage contractors. However, some may be put off by concerns about the reputational impact of a partial return to the PSC staffing model. Others may be worried by the spectre of potential criminal liability for facilitating tax evasion under the Criminal Finances Act 2017. This situation might arise, for example, where a PSC (whose worker was previously deemed by the end user to be an employee under a status determination) starts treating their worker from 6 April 2023 as being self-employed for tax purposes (with the end user’s knowledge) – even though none of the underlying working arrangements have materially changed.

Further guidance is expected from HMRC in due course. Ahead of April 2023, client organisations and agencies will, once again, want to review the terms of their PSC arrangements and supplier agreements to make sure they are primed for the new era. Once that era begins, it may not be time to completely throw out copies of the old-style contracts. The chancellor has qualified his reform plans by emphasising that the government will keep compliance under review.     

Gary Henderson is a partner and Andy Atwell a senior associate in the employment team at CMS