Amongst the multiplicity of announcements made by new Chancellor Kwasi Kwarteng in his “mini-budget”, which created considerable waves in the currency and the UK bonds market, it is possible for the decision to potentially repeal the IR35 reforms relating to off-payroll rules from April 2023 to have been lost. After all, amongst the headline grabbers were the decision to abolish the 45p additional higher rate of tax, reversal of the 1.25% NI rise and the decision to cancel the rise in Corporation Tax. Nevertheless, the potential for IR35 reforms has implications for both contractors and companies which seek to use their services.

Should the reforms be repealed, whilst IR35 will continue to remain in legislation, the burden of responsibility and decision over whether an individual is to be deemed a contractor or employee (i.e.  their IR35 tax status) will shift back on the contractors rather than the companies using their services. This will undo the reforms brought into legislation for private and public sector workers in 2021 and 2017 respectively.

The intention of IR35 was to avoid individuals benefiting from tax avoidance considering the differing tax treatments for employees and contractors who either service the company via a Ltd. company, sole trader or other organisaitonal set-up. Contractors can avoid paying Income Tax and National Insurance if they incorporated a limited company and serviced their client using the same since they would only pay Corporation Tax, which is lower than the tax rates on income, on the profit. Following this, the remaining profit can be extracted using dividends which are also taxed at a much lower rate than traditional income tax (20% for PAYE and 13.25% NIC albeit the latter is expected to drop back down to 12% from November).

The reforms led to a plethora of companies including nearly all their contractors within IR35 where they are taxed as employees to avoid risk of penalties from HMRC as the burden of responsibility currently rests with companies using contractors. Self-employed contractors are also able to deduct expenses which they incur in the course of performing their duties which employees are often unable to. This can reduce the profit available to be taxed as well.

Determining whether an individual is self-employed, or an employee can be very judgmental and depends on a number of factors including:

·  the extent to which they have control over the work they do such as ability to delegate the job to someone else;

·  whether the equipment used to perform the job is provided by the company or the contractor’s;

·  entitlement to holiday and sick pay;

·  whether there any formal performance appraisal measures in place to determine the individuals work etc.      

Whilst it is important to remember that there is no certainty over the abolishment of the reforms materializing, if they indeed do expect smaller companies who are willing to gamble with the nature of the contractor’s status to be more open to using contractors. Given the current talent shortage in multiple sectors, this is likely to compel more resourced organisations to reconsider their recruitment and labour policies to maintain their ability to attract talented individuals, including individuals who wish to be treated as contractors.

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