Repeal of IR35: when is it and what are the implications?

Occupying just two paragraphs in the 42 page Growth Plan 2022, this quiet announcement has generally been greeted positively, although not without a degree of frustration. It is important to note that the Government is not proposing to repeal the off-payroll working/IR35 regime in its entirety: individuals who provide their services through personal service companies (and other qualifying intermediaries) and who would, if they contracted directly with the end client, be employees for tax purposes, will still be required to pay income tax and NICs as deemed employees. However, from 6 April 2023 the duty to assess the individual’s tax status will revert to the intermediary, rather than sitting with the end client.

The 2021 changes (having been postponed from 2020 due to the onset of the COVID-19 pandemic) met with fierce criticism and were widely unpopular. There were concerns that the changes placed undue burdens on end clients, and in some cases that end clients took an overly-cautious approach, making blanket determinations of deemed-employment which resulted (in some cases) in genuine self-employed contractors being subjected to PAYE.

The Government’s justification for the repeal, just two years after the reforms were introduced in the private sector, is that it will free up time and money for businesses that engage contractors and minimise the risk that genuinely self-employed workers are incorrectly classified. Whilst this has been welcomed by many, there will be frustration over the time and expense invested in reviewing working arrangements, updating contracts, making status determinations, dealing with appeals and running PAYE for these types of workers, for the brief period during which these rules have been in place.

Ongoing implications

Public sector bodies and large and medium enterprises in the private sector who engage workers providing their services via intermediaries will of course need to continue to comply with the current rules for services provided up to and including 5 April 2023. It is not yet clear how the repeal will be managed where payments are made for services spanning the 2022/23 and 2023/24 tax years, although it seems likely that provisions similar to the transitional provisions put in place when the reforms were introduced in 2021 will apply (just in reverse).

Companies will also need to be mindful of the corporate criminal offences in the Criminal Finances Act 2017, where a company fails to prevent an “associated person” from criminally facilitating a UK or foreign tax evasion offence. Companies will still need to ensure that contracts with personal service companies genuinely reflect the working relationship, and that they are not drafted to give a false impression of self-employment in order for the worker to avoid paying tax for which they will remain liable under the ongoing IR35 regime.

Other PAYE–related changes

In addition to the headline changes to income tax rates, the Growth Plan also includes:

• a 1.25% reduction to employer’s and employee’s national insurance contributions from 6 November 2022 – this reverses the temporary increase that came into effect in April 2022, ahead of the proposed implementation of the health and social care levy in April 2023;
• cancellation of the proposed implementation of the health and social care levy; and
• full relief on employer’s national insurance contributions in respect of employees working 60% of their time in “investment zones” (once they are up and running) on earnings up to £50,270.

If you have any questions about the changes, or the steps you need to be taking to prepare for the repeal (e.g. reviewing how you engage contractors and revising contract wording), please contact Cathy Bryant, Rajiv Joshi or Madeleine Mould.

The Chancellor has confirmed that details of the Government’s “fiscal plan” will be announced on 23 November and we will keep you updated.