Please note: this was correct at time of writing and subsequently the message from the Government has now changed. You can find further information on the rules surrounding IR35 on the .gov website here:
It’s safe to say that the reaction to Kwasi Kwarteng’s first ‘Mini Budget’ as Chancellor has been a bit mixed. But whatever you make of the other changes he has made, there was one announcement that’s received a lot less publicity or discussion.
It was the news that some controversial IR35 reforms have been repealed. But if you haven’t heard of it, what is IR35? Here’s everything you need to know about it:
IR35 – The History
IR35 was introduced in 1999 by HMRC to try and prevent freelancers from working under the guise of a limited company to pay lower income tax and avoid national insurance.
IR35 applies if you are:
● A worker who provides your services through an intermediary (like your own private company)
● A client who receives services from a worker through an intermediary
● An agency providing workers’ services through an intermediary
If it did apply, you’d need to pay income tax and national insurance as an employee and employer national insurance must also be paid. Basically, you’d need to be paid via payroll rather than on a self-employed basis.
However, it was up to those freelancers to decide if this applied to them until 2017 and 2021 when new stricter reforms came in. These put the onus on businesses and public authorities to decide the status of their contractors, initially in the public sector in 2017 and then in the private sector after 2021.
This hasn’t been popular with freelancers or companies who work with freelancers. It’s caused confusion, and friction and removed the flexibility and agility that freelance workers can bring. But luckily it won’t be a problem for much longer.
What’s changed with IR35?
Along with the Mini Budget, the Treasury brought out a Growth Plan document detailing all of the major changes the Chancellor has introduced. Here’s what it has to say about IR35:
“The 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) will be repealed from 6 April 2023. From this date, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.”
So to put it simply, after April 6th next year, we will be back to the situation we were in before the changes in 2017 and 2021. It will once again be up to the individual freelancer to decide if IR35 applies to them, rather than putting the onus on the businesses who work with them.
It all fits in with Kwarteng’s ultimate goal of making it easier for businesses to grow, and he said: “To achieve a simpler system, I will start by removing unnecessary costs for business. We can also simplify the IR35 rules and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses. So as promised, by the prime minister, we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”
Of course, this isn’t the same as removing IR35, which some people including former Cabinet member David Davis have called for. It may also cause some frustration for businesses who have had to go to the effort of putting procedures in place to comply with the reformed legislation, only to find out that they won’t need to anymore.
This hasn’t been universally popular because it potentially leaves IR35 open to abuse, but Martin McTague, national chair of the Federation of Small Businesses, said: “The Chancellor has done the right thing in getting rid of IR35. Scrapping the poorly thought-out, unnecessary and burdensome IR35 rules that restricted small businesses’ and self-employed people’s ability to do the work they need is a very positive move.”
We’re still awaiting further clarification from the Government about how the repeal will work in practice. Hopefully, there will be guidance on how businesses and freelancers move back to the old way of working without risking accidentally not complying with the rules and ending up paying too little or too much tax.
However, it is certainly good news for businesses who want to be able to be more agile in how they use freelance talent. And that can only be good news for freelancers looking for more opportunities with less red tape getting in the way.