Kingsbridge Insurance

Has IR35 been scrapped?

IR35 has seen its fair share of changes since it was introduced in 2000, but at no point has it ever been scrapped. However, there have been reforms to the parliamentary legislation which were almost repealed in April 2023.

As you may already know, IR35 aims to prevent the issue of ‘disguised employment’ in the flexible labour market. This is where those who aren’t genuinely self-employed workers for tax purposes (i.e. they work in the same way permanent employees do) operate via an intermediary to gain tax benefits. Here, we talk through the legislation, its updates, and the recent proposed repeal.

The truth about the IR35 reforms and repeal rumours

What changes have occurred?

Before April 2017 in the public sector and 2021 in the private sector, the responsibility for assessing whether an engagement was ‘inside IR35’ (i.e. where workers are classed as employees for tax purposes, and should pay Income Tax and National Insurance Contributions) or ‘outside IR35’ (i.e. they’re genuinely self-employed contractors for tax purposes) fell on the contractor to determine. This was until the reforms, also known as the ‘off-payroll working rules’, were implemented.

The off-payroll working rules were first implemented in the public sector in April 2017, and meant that all public sector organisations held the responsibility of determining employment status for tax purposes for their engagements. The reforms were then extended to the private sector in April 2021, and meant that the responsibility shifted towards the private business in an engagement (although there are exceptions – more on this later).

Many issues have arisen since. For instance, some workers who are genuinely self-employed for tax purposes have been forced to work via an umbrella company rather than their own Personal Service Company (PSC). This was due to end clients taking a unnecessarily risk-averse view. The number of PSCs has decreased as a result, and some clients have had to increase day rates to cover off the difference in take home pay to the workers.

Were the reforms repealed?

The off-payroll working rules are still in place, though they were very briefly due to be repealed. The section below explains this in further detail.

Why people thought the IR35 reforms were repealed

What were the tax measures announced in the mini-Budget?

On 23rd September 2022, the then-Chancellor of the Exchequer Kwasi Kwarteng announced that the off-payroll reforms in the public and private sectors would be repealed from 6th April 2023. This was part of Prime Minister Liz Truss’ government’s tax plans to promote economic growth.

Had it gone ahead, it would mean that contractors once again would need to assess the status of their own engagement, and the end client would no longer be obliged to. However, newly appointed chancellor Jeremy Hunt announced on 17th October 2022 that the repeal would be reversed. So, no changes to the off-payroll working rules occurred.

Updates to the rules in the public and private sectors

How have the rules changed in the public sector?

Because the reforms weren’t repealed, the off-payroll rules remained in place and the end client remains the party responsible for determine the engagement’s status.

These reforms also introduced the concept of a ‘fee-payer’. The fee-paying party is the one closest to the contractors intermediary in the supply chain. They have the responsibility of paying the contractor, and they also hold the tax liability. This means that if an engagement status is incorrect, they’d be responsible for the outstanding tax. If it’s a direct engagement, then the fee-payer is the client. If a recruitment agency or agencies are involved, then it’s the agency closest to the contractor’s intermediary.

How have the rules changed in the private sector?

They’re the same as when they were first introduced in April 2021 and mean that the responsibility for determining status rests with the end client.

Yet there is one crucial difference compared to the public sector reforms: end clients that are considered a small business (in line with the Companies Act 2006), or based wholly overseas, don’t determine status. Instead, the responsibility falls to the contractor under the ‘old’ rules. The client or recruitment agency is obliged to tell the contractor if this is the case should they ask.

How to comply with the reforms

When it comes to complying with the IR35 reforms in either the public or private sector, we recommend seeking specialist support. Whether you’re a worker, the end client, or a recruitment agency, you should understand the off-payroll working rules and the impact it has on you and others in the supply chain.

Whoever determination falls to, a reputable tool should always be used – like Kingsbridge’s IR35 Status Tool. There is also HMRC’s CEST tool, although it has had its failings.

It’s also vital that a contract review and a working practice review are performed by a professional. This should be carried out whenever there is a change of assignment or working arrangements – even if the engagement is with the same company. A contract should reflect actual working practices, too, as this feeds into determining IR35 status.

Will there be changes to the off-payroll working rules in the future?

There may be changes in 2024 following a 2023 consultation which focused on the tax offset. It seems likely this will go ahead, and it’ll allow HMRC to account for taxes that have already been paid by a worker when calculating their PAYE liability due by the fee-payer where the off-payroll rules weren’t applied correctly.

You should note that these changes only relate to the tax offset – the rules around determining status will stay the same.

Additional resources

We understand that IR35 and its reforms – and proposed repeals – have caused unnecessary complexity. For guidance from our IR35 experts, get in touch.

And if you’d like to learn more about IR35 or the off-payroll working rules, we have many valuable resources for further reading: