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Mini Budget 2022: Freelancer and contractor IR35 reforms revoked

Nick Cheek
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Nick Cheek

Changes to off-payroll working rules, known as IR35, will be overturned from April next year in a bid to simplify the tax system.

The changes come into force from 6 April 2023 and mean IR35 workers will once again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance Contributions (NICs).

IR35 tax rules apply to workers, freelancers and contractors who provide their services through their own limited company or another type of intermediary to a client, but who would otherwise be an ‘employee’ if the intermediary was not used.

Self-employed contractors typically work under this kind of arrangement which reduces the tax they pay.

As part of the government’s clampdown on ‘tax avoidance’ by these ‘disguised employees’, it brought in the IR35 rules for the public sector in 2017. These rules were then extended to the private and third sector in 2021.

Overall, it makes sure these workers pay broadly the same tax and NICs as an employee. It also passed the tax burden from the intermediary to organisations and it is this which has been repealed as part of today’s announcement.

‘Unnecessary complications and costs’

In his mini Budget today, Chancellor Kwasi Kwarteng said that reforms to IR35 rules had “added unnecessary complications and costs for many businesses” so they would be removed.

Policy documents read: “This will free up time and money for businesses that engage contractors, that could be put towards other priorities. The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules”.

According to research from the Association of Independent Professionals and the Self-Employed last year, around 35% of contractors had left self-employment since changes to IR35, either moving to permanent employment, retiring, working overseas or simply not working.

And earlier this year, a report from the National Audit Office showed that the 2017 reforms meant HMRC faced “new risks” while cases of non-compliance were likely to fall on employers.

Open the door to tax avoidance?

John Chaplin, employment tax partner at BDO, said: “The Chancellor’s commitment to simplification is certainly likely to be welcomed by individuals and businesses alike. The current IR35 rules were however implemented to tackle non-compliance with the old rules.

“If the clock is turned back, will we simply have a return to non-compliance? While compliant businesses and contractors are in a healthy position, today’s announcement could help open the door to those wishing to promote tax avoidance”.