IR35 reform to stay: But what does this mean for contractors?

Off-payroll working rules will not be scrapped next April, new chancellor reveals

IR35 reform will not be repealed next April, the Chancellor announced today (17th October).

In a short statement made by Jeremy Hunt, who was only appointed last Friday after the sacking of Kwasi Kwarteng, the new Chancellor confirmed that the off-payroll working rules will remain. 

As part of a fiscal announcement brought forward due to the economic uncertainty caused by September’s mini-Budget, Hunt said the government will reverse almost all of the changes unveiled by his predecessor. 

In addition to the scrapping of the IR35 reform repeal, the government has now:

• Cancelled next year’s freeze to Corporation Tax (which will rise from 19 - 25% next April)
  
  
• U-turned on the abolition of 45p income tax rate 
  
  
• Backtracked on plans to cut basic rate income tax to 19p (it will remain at 20p indefinitely)
  
  

• Scrapped next April’s 1.25% point dividend tax reduction 
  
  

One of the raft of tax cuts unveiled in September – the 1.25% point reduction in national insurance contributions (NICs) – will remain. But beyond this, other than stamp duty cuts, there is little left of Liz Truss and Kwasi Kwarteng’s now infamous mini-Budget. 

What does this mean for contractors?

Focusing on IR35, with reform to remain in play, nothing will change for contractors in a literal sense. 

Public sector organisations and medium and large private sector businesses will stay responsible for assessing IR35 status, with the fee-paying party liable in the event of non-compliance. 

The only instance in which a contractor is tasked with administering IR35 is if they are engaged by a company which meets the government’s criteria for ‘small’. 

Why did the government change its mind over IR35?

The mini-Budget saw the pound tumble to historic lows, leading to widespread economic uncertainty.

It meant pressure was mounting on the government to reverse aspects of the mini-Budget, despite Prime Minister Liz Truss insisting that her vision would result in economic growth. 

The repeal of IR35 reform, like nearly all other parts of the mini-Budget, was axed – a move which the government has claimed will cut the cost of the Growth Plan by around £2bn a year. 

However, as our CEO, Seb Maley, explained in The Times, scrapping the incoming repeal is “the wrong decision at the wrong time”. Seb elaborated on this in a post featured in LinkedIn news, explaining that “while some of the U-turns make sense, cancelling the reversal of IR35 reform doesn’t…it’s a knee-jerk reaction which, in my opinion, won’t benefit the economy overall”.

What does the future hold for contractors?

Few predicted that IR35 reform would be repealed prior to the mini-Budget. It was, by all accounts, an unexpected – yet welcome – bonus. But the economic backlash following this fiscal statement meant that as the days and weeks passed, so did the likelihood of a rethink.

While contractors are right to be disappointed and concerned that the off-payroll working rules will not be repealed, more businesses are taking a fair and measured approach to IR35 is increasing. 

This is evidenced by Qdos research, which identified an 83% surge in the number of contractors engaged outside IR35, between April and November last year. 

What can contractors do?

Contractors should continue to carry out their own IR35 due diligence to ensure that the IR35 determination issued by their client is correct. An IR35 contract assessment, for example, can prove important in successfully overturning an incorrect determination made by a client. 

Finally, regardless of the fact that the IR35 liability rests with fee-payers (rather than the contractor) HMRC retains the right to investigate contracts that completed prior to the introduction of IR35 reform (2017 in the public sector and 2021 in the private sector) – it’s why many contractors continue to protect themselves with IR35 insurance.