Insights

Nighat Sahi

Published 28 September 2022
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The Reversal of IR35

With a new Prime Minister in place, on the 23rd September 2022, the new Chancellor announced the government’s plan for growth which has been described variously as a mini-budget, a fiscal event and a financial statement. In amongst the various tax cuts and initiatives, and the media attention, was a surprise announcement for the reversal of IR35 off-payroll worker provisions with effect from 6th April 2023.

A quick re-cap of IR35

You will recall that the new IR35 provisions came into force in April 2021. Their purpose was to remove the tax advantages of providing services via a “personal service company” (PSC) whereby the contractor was in reality actually a ‘disguised employee’. Previously, it was the contractor’s (or rather their PSCs) responsibility to determine whether or not he or she fell within the IR35 provisions. That changed in 2017 when the government extended the scope of the rules to include all public sector organisations, with the hiring organisation becoming responsible for determining the employment status of contractors.

In April 2021, the rules were expanded again to include most private sector businesses so that the “end-client” hiring organisation was responsible for deciding whether a contractor was actually an employee and if so, the fee-payer (usually the organisation but sometimes a recruitment agency) would then be responsible for deducting income tax and NICs from the contractor’s fee.

What does the reversal mean?

It means that if a contractor engages with a company (an end user) through a PSC, it will be the responsibility of that PSC to make an assessment as to the employment status of the contractor (for tax purposes). It also means that the end user is not exposed to PAYE or National Insurance contributions (NICs) if the employment status assessment is incorrect. Instead, these will be payable by the contractor/their PSC. The reversal applies to both public and private sector organisations but is not retrospective.

Why the reversal and is it good news?

The government’s stated motive behind the change is to simplify the tax system and it is likely to be welcomed by organisations and contractors alike. A number of businesses have struggled with the requirement to make employment status assessments which were seen as complex and costly, and many contractors will welcome the return to more favourable tax treatment. What’s more, there has been concern about large organisations issuing blanket bans on engaging PSCs.

Do you need to take action?

Both parties in such a situation should now review their contracts before enactment on 6 April 2023. However, contractors will need to give careful consideration as to whether or not it is appropriate to claim they are now outside the scope of the provisions if it has been previously determined that they were within scope. A number of contractors may also want to reconsider whether to restart their limited company status but there are tax implications of doing so.

If you are affected by the reversal of IR35, we would urge you to contact us for legal advice as soon as possible.   

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