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IR35 Repeal: The pros, cons and thoughts from the industry

  • Publish Date: Posted about 2 months ago
  • Author:by MERJE

Please note: This article was written after Kwasi Kwarteng's September 23rd announcement about repealing the IR35 reforms, but before Jermey Hunt's 17th October announcement declaring that the repeal would not go ahead.

On September 23, Chancellor of the Exchequer Kwasi Kwarteng announced the repeal of the latest IR35 reforms.

Rolled out in 2017 and 2021, the updates to the off-payroll working rules meant that the end client was responsible for deciding the nature of their contractors’ working relationship with the business.

According to the Chancellor’s latest announcement, these reforms will be reversed from April 2023, meaning the liability will once again fall with the contractor themselves and they will be responsible for determining their employment status and paying the appropriate amount of tax and NICs.

The contracting market

Current IR35 rules were brought into play with the aim of putting a halt to the promotion and misselling of disguised remuneration schemes so, since the change, employers have shouldered the responsibility of determining the tax status of their contractors.

With many businesses unwilling to accept such a risk, blanket bans on the use of contractors have been put into place in a lot of cases.

Meanwhile, firms which have embraced the new legislation have faced hiring challenges as the availability of contracting candidates has reduced significantly.

35% of contractors left self-employment following the 2021 IR35 changes

The private sector’s post-2021 IR35 rules meant that operational costs for self-employed workers increased significantly, whether working inside or outside IR35. In fact, IPSE reported that 80% of freelancers saw their quarterly income decrease following the IR35 changes.

This, combined with the reduction of contract opportunities, particularly those classed as outside IR35, led to many contractors abandoning the self-employed career altogether, with the same research finding that over a third of contractors (35%) left self-employment following the 2021 changes.

Furthermore, of those professionals who have continued in the contracting market, 31% stated that they have refused a contract because the client deemed the engagement to be inside IR35, and one in five (20%) stopped working with a client because the client now deemed the engagement to be within IR35.

The reduction in available contractor candidates, and the unwillingness of a vast proportion of those candidates to work inside IR35, has left employers struggling to fill their interim vacancies; something MERJE has clearly witnessed as we saw a 40% reduction in contracting candidates from 2020 to 2021.

Moving forward

The April 2023 repeal could go some way to reversing the recent changes to the contracting landscape, with professionals potentially flocking back to the self-employed career path and businesses once again embracing contractor hiring.

But it may be too soon to place your bets.

The repeal is pencilled in for April 2023, but this depends on the success of the next Finance Act, and Tory Ministers are briefing that they may rebel against the next Finance Act if the pound falls below the dollar.

As well as this, the government has not yet confirmed whether or not pre-April 2023 IR35 determinations will be taken into account when investigating cases after the legislation is repealed.

If current IR35 determinations are taken into account by HMRC, contractors who re-determine their roles as outside IR35 after previously being classed as inside by the employer’s assessments potentially leave themselves open to additional scrutiny.

In these cases, contract workers will need to consider amending their contract to recognise self-employment while ensuring that legal criteria is met, as well as confirming they have tax investigation insurance to protect themselves from fees associated with HMRC inquiries.

What next

It seems that the Chancellor’s announcement has thrown up many questions, and no conclusions can be drawn about the future of the contracting landscape just yet.

And what do professionals in the industry think about the potential changes? We explored that question here.

Want to discuss how IR35 will affect your business or career? Get in touch with our expert team.