· News

IR35 complications to continue after Jeremy Hunt’s u-turn

Experts have warned of further turbulence to come following Jeremy Hunt's announcement that the proposed repeal of IR35 reform and income and dividend tax cuts have been cancelled.

Yesterday, 17 October the newly appointed chancellor announced a slew of measures backtracking on plans set out by former chancellor Kwasi Kwarteng in his mini-budget on 23 September.

Included among them was a u-turn on the repeal of IR35 reform, which would have meant employers would no longer be responsible for assessing workers' employment status and handling all tax and national insurance contributions for self-employed contractors and agency workers.

Problems with IR35:

IR35 and zero-rights employment continues

IR35: off-payroll one year on

Umbrella firms trigger storm warnings

Kwarteng's announcement was one of the few well-received parts of the mini budget, after critics had accused the reforms of causing tax-avoidance and other unintended disadvantages since being introduced in 2017 (public) and 2021 (private).

Seb Maley, CEO of tax consultancy Qdos, said cancelling the repeal is unnecessary.  

Speaking to HR magazine he said: “The government will have lost all credibility with contractors after this needless u-turn.

“Out of all the tax changes announced in the mini-budget, in my opinion, the plan to repeal IR35 reform was the least controversial – it was logical, fair and would even help generate revenue for the Treasury.”

By keeping IR35 the same Dave Chaplin, CEO of tax compliance firm IR35 Shield, said he expects more strict enforcement to come.

He told HR magazine: “HMRC is already enforcing the off-payroll rules and given the apparent perilous state of the public purse, it is likely that HMRC will up its game.”

As for potential reasons behind the u-turn, he added: “The off-payroll reforms have been and are political cancer for the Conservatives, and they admitted in their Growth Plan that it leads to misclassification of genuinely self-employed people who want to be their own boss.

“The policy itself has structural flaws, as pointed out by the National Audit Office and the Public Accounts Committee. And yet they decided to keep it. And yet they still claim they are pro-growth. It’s anything but.”

Penny Simmons, legal director at law firm Pinsent Masons, however argued sticking to 2017/2021 IR35 measures will be a relief for many.

She said: “In the longer term, IR35 still doesn’t work properly and needs to be heavily reformed. However, in the short term, businesses will be relieved that they don’t have to scrap all the work they have done in the last few years to be compliant with the current rules.

“It would be good to see the Treasury take this opportunity to undertake a comprehensive review of the IR35 rules and commit to real reform. That should include dealing with one of the major issues with IR35 – the complex test for determining whether someone should be an employee or self-employed.”

Proposed income and dividend tax cuts will be scrapped too, and the proposed energy price guarantee will only be in place for six months rather than the initial promise of two years.

November’s reduction in class 1 employer and employee national insurance contributions will remain under Hunt’s plan, along with stamp duty cuts.

Lee McIntyre-Hamilton, employment tax specialist at Keystone Law, said these reversals and sticking to NIC reductions are welcome.

Speaking to HR magazine, he said: “Employers will be heartened by the focus on economic stability as there is no point in tax cuts for either employers or employees when the markets are in turmoil and interest rates and inflation are rising uncontrollably.

“Once the fiscal dust has settled, the government should throw themselves into supply-side reform – improving infrastructure, addressing inequality, attracting new investment and all those things that increase productivity across the country.”