What does the scrapping of IR35 rules mean?

The off payroll working rules, also known as IR35, were introduced by HMRC back in 1999. They were introduced to try to stop individuals who were working like an employee but under the guise of a limited company. This was happening as freelancers who operate through a private company tend to pay a lower income tax level and don’t have to pay national insurance, potentially delivering significant savings and benefits to them.

When this was first introduced, it was up to the individual to assess whether they fell under IR35. This was tightened in reforms introduced in 2017 and again in 2021 which pushed the responsibility from the individual to businesses and public authorities to decide the status of the contractors they were using. After the reforms, the rules applied if a worker provides their services to a client through an intermediary but would be classed as an employee if they were contracted directly.

Groups that were affected included:

• A worker who provides their services through their intermediary (normally their own private company)
• A client who receives services from a worker through their intermediary
• An agency providing workers’ services through their intermediary

In those cases, under the previous rules, income tax and employee national insurance contributions were deducted from fees and paid to HMRC. Employer national insurance contributions also had to be paid.

What happens to the IR35 rules now?

In the recent mini-Budget statement the new Chancellor Kwasi Kwarteng stated:

“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.”

So once again the individual, rather than a business or public authorities, will be responsible for determining their own employment status. Once again self-employed workers who provide their service through their own companies will be responsible for paying the right amount of tax and national insurance contributions. It is hoped that this will free up time and money for businesses that engage contractors which the chancellor said could be put towards other priorities. The reform should also minimise the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.

What does this mean for clients who have recently closed their business or thought about it due to IR35?

If you closed your business recently as you had been deemed an employee of a business, you were contracting with you may wish to review this. A lot of companies had determined contactors to be employees as they were being extra prudent and even in some cases were not reviewing the on a case-by-case basis as this was too costly so were taking a blanket approach of only treating people as employees.

If this was the case, it may be that you can go back to working as a contractor and invoicing the companies engaging you which may be the most tax efficient option for you.

The government have said that they are going simplify IR35 rules so if you are yet to close your company it may be worth keeping it open to establish whether you will still be deemed a contractor once they review the rules.

Once the review to the rules is announced we will be able to confirm your position and advise whether to start trading through a limited company again.

Note: If you have recently closed your company and claimed business asset disposal relief we will need to review the impact of starting a new company providing the same service on your tax position.

If you have any questions, please do get in touch with us here.