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UK IR35 employment tax compliance changes to be repealed

Income tax form IR35

Changes to the IR35 employment tax rules introduced in April 2021 will be repealed from April 2023, shifting responsibility for compliance back to individuals rather than their employers, the UK chancellor has announced.

While the initial reaction from business is “likely to be positive”, tax expert Penny Simmons of Pinsent Masons said there will also be “huge frustration regarding the immense amount of time and money that businesses have spent on ensuring compliance with the rules”.

“Businesses have had to completely change the way that they engage with off-payroll workers, which has been costly and time-consuming,” she said. “But repealing the rules doesn’t mean that that’s the end of the story – businesses will now have to spend time and money once again reviewing their arrangements for engaging off-payroll workers and their agreements with both contractors and labour supply agencies. So, ripping up the rule book won’t necessarily translate into reduced compliance costs in the short term.”

Simmons Penny

Penny Simmons

Legal Director

Ripping up the rule book won’t necessarily translate into reduced compliance costs in the short term

The IR35 rules require that employment taxes be paid by people who provide services to a business through a personal service company (PSC) or other intermediary if that person would otherwise have been regarded as an employee for tax purposes of the engaging business.

From 6 April 2021 engaging private sector businesses, rather than the engaged individuals, became liable for determining whether the IR35 rules apply, operating PAYE and paying employers' National Insurance contributions for contractors falling within the scope of the rules. This change had already happened in the public sector. The IR35 regime itself will not be repealed: rather, liability to decide whether the rules apply and to pay any employment taxes will again rest with the individual’s PSC or other intermediary.

Simmons said: “Repealing the changes to IR35 doesn’t mean that’s the end of the IR35 story. The rules will still exist - it’s just that contractors will once again be responsible for compliance and payment of tax. The chancellor has also made it clear that compliance remains under review – so it’s not outside the realms of possibility that further changes could be on the horizon.”

“Businesses also need to be aware that they will remain exposed to tax risks by virtue of other tax rules such as the corporate criminal tax offences – ultimately, businesses could be exposed to criminal liability if they pay contractors off-payroll when they know that the contractors should be taxed as employees,” said Simmons

The corporate criminal tax offences, introduced in 2017, make a business vicariously liable for the criminal acts of its employees and other persons 'associated' with it, even if the senior management of the business was not involved or aware of what was going on.

“Today’s announcement will also do nothing to help resolve the uncertainty in the law regarding when an individual should be taxed as an employee,” said Simmons. “The test for determining employment status for tax purposes remains complex and uncertain – it’s just that from April the burden of applying the test will once again sit with individuals.”

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