Limited company contractors welcomed the government’s decision to repeal controversial off-payroll working (IR35) reforms as part of the Chancellor’s mini budget earlier this month.
The change means that from April 2023, contractors can once again make determinations about their own employment status. But some experts worry that contractors could fall into a tax liability trap.
Dexter Dyer, Partner at Cloudaccountant.co.uk said:
“IR35 will still exist in April 2023. The only thing that will change is that the responsibility for determining a worker’s IR35 status goes back to the individual contractors, rather than the clients that engage them.”
The government U-turn will reverse IR35 reforms made in the Public Sector in 2017 and the Private Sector in 2021.
The previous reforms were introduced because HMRC believed that IR35 compliance was very low, but the rules made hiring contractors harder and riskier, and led to many companies forcing all contractors ‘inside IR35’.
The new chancellor Kwasi Kwarteng said that reversing the changes will “minimise the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules”.
Dexter Dyer continued:
“Contractors are overwhelmingly in favour of this change, but I would encourage anyone that’s currently ‘inside IR35’ to exercise caution before switching themselves to ‘outside IR35’ next April.
We’re expecting HMRC to step up IR35 enforcement action in light of this change. In the past, IR35 enforcement has been fairly ineffective. The difference now is that HMRC has more information about contractor tax status based on client IR35 determinations.
In the past, HMRC has said it won’t use client determinations to backdate IR35 compliance checks, but they haven’t said whether they’ll use client determinations in investigations going forwards.
If you’ve been given an ‘inside IR35’ determination, but you think you are genuinely self-employed, you should look carefully at your contract and working relationship before making any changes.”
Andy Chamberlain, Director of Policy at IPSE echoed this sentiment, suggesting contractors get tax investigation insurance to protect them from costs associated with an HMRC enquiry before they move to ‘outside IR35’.
He said:
“We are delighted that the new Chancellor agrees with what we have been saying for years – that the 2017 and 2021 reforms create unnecessary complexity for contractors and businesses. It is with huge relief that we welcome this dramatic shift in government thinking.
As delighted as we are with the news, we remain concerned that the underlying IR35 rules will stay in place, and we hope to work with the government to make further progress on this issue in the weeks and months ahead.”
The Chancellor’s mini budget included more policies that will affect contractors including reversing a 1.25 percentage point increase to employer and employee National Insurance Contributions (NICs). This 1.25 percentage point increase equated to around 10% NICs increase for most contractors.
For more information about the IR35 changes and how they could affect you, get in touch here or call: 0808 281 0303.