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All change again: “As You Were” on IR35

In the far from “mini” budget unveiled on 23 September 2022 the Chancellor announced that the IR35 reforms which came into effect in 2017 and 2021 will be abolished from 6 April 2023.

These reforms require end users (usually the client the contractor works with day to day) to determine whether contractors engaged through personal service companies (“PSCs”) are in a relationship akin to employment. If so, the end user must usually deduct tax and National Insurance Contributions (“NICs”) at source. Many businesses found the reforms difficult to navigate with the result that some no longer engage contractors through PSCs.

Whether the Chancellor’s proposed abolition comes into effect remains to be seen. The Government has already u-turned on removing the 45% rate of tax and with the IR35 change set to cost £1-£2 billion a year, the Chancellor may yet be for turning. However, if he does not end users will no longer need to assess the status of their contractors and they will not be exposed to tax or NICs if it is incorrectly determined that an individual is a self-employed contractor instead of a “deemed employee”. Instead, tax and NI will be payable by the contractor/their PSC as it will be the responsibility of the PSC to make an assessment for tax purposes.

Whilst this change seems, on its face, straightforward, its impact is unlikely to be immediate.  Contractors and businesses will not be able to ignore a pre-6 April 2023 status determination easily and no doubt HMRC would be very interested if, in the context of the same engagement, a pre-6 April 2023 “deemed employee” suddenly determines that they are a self-employed contractor. Businesses which are complicit in such behaviour may also risk prosecution for facilitating tax evasion and an unlimited fine.

In addition, the proposed IR35 changes will not affect the legal rights of contractors. Contractors who are also “workers” or “employees” could have valuable rights under UK employment laws meaning that getting the status of a contractor wrong could be costly. In a recent case a wrongly categorised worker was entitled to receive holiday pay going back to the very start of their contract (a period of close to six years in total).

Whilst we wait for legislation to repeal the 2017 and 2021 IR35 changes some organisations may decide to review their contractors and the indemnity wording in their current contracts to ensure that the business is adequately protected. Others may decide to wait until Government’s fiscal plan is announced on 23 November before taking action; after all it could be all change, again!

Article by

Maria Krishnan, Associate Solicitor

 

Jane Brown, Solicitor

 

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