Chancellor Kwasi Kwarteng revealed the decision during the government's mini budget announcement on 23 September.
A £400 household rebate for help with energy bills, a reversal of the 1.25% rise in national insurance and a reduction in income tax were also announced.
IR35 reforms first came into effect in April 2021, shifting the responsibility for determining a worker's employment status from the employee to employer.
Employers were also now responsible for handling all tax and national insurance contributions (NIC) for self-employed contractors and agency workers.
However from April 2023, existing Intermediaries Legislation, which came into effect in 2000, will apply and so contractors will once again be responsible for their own tax liability.
This will no longer be the case as explained by Dave Chaplin, CEO of tax compliance firm IR35 Shield.
Speaking to HR magazine, he said: “Contractors and businesses will be celebrating as Liz Truss and her government have not only kept to their promise but gone further and repealed legislation that has had a damaging effect on business and contractors’ livelihoods for the past five years.
“These onerous reforms were never going to work and were flawed from the start. The recent Court of Appeal Atholl House case further highlighted the structural deficiencies of the legislation. The chancellor has done the right thing and removed an unnecessary burden for firms of trying to solve a complex riddle every time they hire a worker."
IR35 in practice:
The repealing of IR35 was welcomed by the HR community.
Posting on Twitter, Angela O'Connor, CEO of the HR Lounge, said: "IR35 changes sounds like good news, it’s been an almighty pain in the butt."
Matt Fryer, managing director at Brookson Group, said the changes would be an overall positive for HR teams.
He said: “The u-turn will be welcomed by HR, procurement and legal teams, as it removes a significant threat of tax liability and burden of compliance risk from hiring businesses. This should help to unlock the potential of flexible workforces at a time of increasing demand for highly skilled temporary workers, particularly in industries such as IT, engineering, energy and healthcare.
"While many will be frustrated at the time and energy that has been spent on adapting to the new rules, these efforts have not been entirely wasted. Hiring businesses now have a greater visibility of their flexible supply chain, allowing them to better monitor and control costs and legal compliance.
"HR teams can use this visibility continue to pay close attention to employment and payroll compliance in the supply chain."
Crawford Temple, CEO of Professional Passport, criticised the impact of the original reforms.
He said: "The legislation opened the floodgates to disguised remuneration schemes, once again highlighted by experts, that have had a punitive impact on contractors’ pockets whilst the perpetrators of the schemes have financially flourished. Implementation of these new rules has cost companies millions of pounds so it is disappointing that the warnings were not heeded before pressing ahead.
"Implementing off-payroll has created a car crash and much damage has already been done. It has taken up until now for the government to acknowledge this. However, the government urgently needs to press HMRC to provide detailed guidance, on the back of today’s announcement, relating to the application of the MSC legislation."