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Out-Law News 2 min. read

UK IR35 U-turn receives mixed reaction

Last year’s changes to the UK’s IR35 employment tax rules will no longer be undone, the new chancellor has announced, amid a raft of U-turns on prime minister Liz Truss’ flagship economic measures.

IR35 rules were first introduced in 2017 and amended in 2021. Truss had planned to remove the 2021 amendments, returning the rules to their 2017 form. Jeremy Hunt said that this will now not happen in April 2023 as planned. Penny Simmons of Pinsent Masons said businesses will be likely to have “mixed reactions” to the announcement, which will mean that responsibility for compliance and tax will remain with businesses rather than individuals. “The 2021 changes to IR35 had created significant compliance and tax risks for businesses and were expensive and onerous to apply, so to some extent businesses had welcomed the planned repeal – which would have eased this compliance burden in the long term,” she said.

“But businesses were also hugely frustrated that, having spent significant amounts of time and money changing their processes to comply with the new rules, they would now need to spend more time and money reviewing their off-payroll worker engagement processes once again. Given that no details were published since the initial repeal announcement, businesses had no idea what repeal would look like. That led to uncertainty, particularly for those businesses trying to finalise labour supply arrangements for projects due to begin early next year,” Simmons said.

The current 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. Since April 2021, businesses have been required to determine whether engagement with an individual through a PSC falls inside the IR35 rules, and therefore whether the PSC contractor would be considered an employee for tax purposes. This change had already happened in the public sector.

Simmons said that the chancellor’s U-turn, which came alongside the announcement that cuts to corporation tax, income tax and a freeze in alcohol duty would be scrapped, was “an opportunity to undertake a comprehensive review of the IR35 rules” and to “commit to real reform”.

“September’s mini budget was the most open admission from the government that the IR35 rules don’t work effectively and have imposed too high a compliance burden on business. Despite this, there was never an intention to repeal IR35 fully. Instead, ministers planned to return to the 2017 regime – which was previously acknowledged as not working well and enabling widespread tax avoidance. The big question is what happens next,” Simmons said.

“With this U-turn, it is hoped that the Treasury can deal with one of the major issues with the rules – the complex test for determining whether someone should be taxed as an employee or on a self-employed basis.” Simmons said that simplifying this test would reduce uncertainty and the compliance burden on businesses when applying the rules.

“Effective reform will require consultation with tax professionals and stakeholders across industry to find a solution. This will ensure that we develop a fairer tax system for engaging off-payroll workers – one that is not overly burdensome for business and is not vulnerable to unacceptable tax avoidance,” Simmons said.

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