New Chancellor Jeremy Hunt has used an emergency statement this morning to make a U-turn on plans to scrap changes to IR35 payroll rules, which impact many IT contractors. Previous chancellor Kwasi Kwarteng cancelled the amendments to the rules as part of his ‘mini-Budget’ last month, but now the government has changed its mind again as it looks to undo many of the announcements in Kwarteng’s statement that plunged the UK economy into chaos.
Hunt, who took up the role of chancellor on Friday, said this morning that the IR35 reforms would be going ahead. “The government has today decided to make further changes to the mini-Budget,” the Chancellor said. “We will reverse almost all the tax measures announced in the growth plan three weeks ago that have not started the Parliamentary process.
“We will no longer be proceeding with the reversal of off-payroll working reforms [IR35] introduced in 2017 and 2021.”
Other changes such as the planned cut in the basic rate of income tax are also being abandoned.
How is IR35 changing in 2023?
IR35 is used by many companies to pay “off payroll” staff – contractors hired on short-term contracts or through agencies. The rules are designed to counter tax avoidance and what HM Revenue and Customs dubs “employment in disguise”: contractors who the Treasury would consider employees under tax law and therefore would be taxed as such.
Kwarteng had announced in the mini-Budget that IR35 rules would be simplified, with reforms introduced in 2017 and 2021 being scrapped completely as part of a drive to cut red tape for employers and make it easier to hire new staff.
He said that from April, workers across the UK would be responsible for setting their employment status and ensuring they pay the appropriate amount of tax and national insurance contributions.
Instead, the reforms, which put this burden on the “end client” – the business or recruitment through which the staff member was employed – will be enacted, following Jeremy Hunt’s emergency statement
This has tax implications for the government. If a contractor falls inside IR35, they are what is called a ‘deemed employee’ for tax purposes. This means that the hiring business needs to pay an extra 13.8% of taxes on top of the money agreed to pay the contractor.
What do businesses think of IR35 reforms?
The cancellation of the changes had been welcomed by businesses. Speaking to Tech Monitor last month, Tommy McNally CEO of accountancy firm Tommys Tax, said Kwarteng had “done the right thing and removed unnecessary worry for firms as well as reducing employer national insurance and pension liabilities on top of payroll admin time and cost”.
He also argued that, for staff, the change would be a positive one, as it would mean expenses could be offset against their tax bill. McNally added it would make it easier to move between jobs which “really benefits the gig economy”. This is particularly useful for tech professionals “during a time when demand is high and wages are increasing month on month”, he said.