Employment and tax experts have roundly hailed the Chancellor’s shock pledge to scrap contentious IR35 reforms.
It is claimed the reversal will remove a “real burden” for businesses and contractors, and there has even been a suggestion it could tip the next general election.
Kwasi Kwarteng caught most off guard when he promised to repeal changes to off-payroll working laws that only came into force last year.
Announced on Friday as part of the Chancellor’s plan for growth, the move is designed to give a shot in the arm to the UK’s ailing labour market.
It means from April 2023, the responsibility for deciding employment type will return to contractors themselves.
Changes to the IR35 rule were aimed at stopping employees from registering as freelancers in order to pay less tax.
After the reforms went live in April 2021, with a year’s delay due to Covid, businesses were responsible for determining employment status, with heavy fines for those that got it wrong.
An end to ‘onerous’ laws
But they were criticised for being overly complex, and studies found many firms had stopped using contractors as a result.
Dave Chaplin, chief executive of tax compliance firm IR35 Shield, says freelancers and companies will be toasting the decision to remove the “onerous” reforms.
He said: “The new version of IR35 has simply served to pour glue on the economy and prevent growth. 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.
“Today’s bold move by Kwasi Kwarteng may well have given the Conservatives a chance of winning the next general election.
“The Stop The Off-payroll Campaign I personally ran for four years spelt out the punitive effect that the legislation would have and it came to pass. My final word to the government on the matter is ‘I told you so – and finally you listened’.”
Impact on employers and workers alike
About a year after the IR35 reforms had been implemented, Kingsbridge Contractor Insurance published research laying bare their damaging impact.
Studies found some oil and gas firms were struggling to fill “vital roles”, with around 75% reporting a reduction in their contractor workforce.
On the other side of the fence, around half of freelancers said they had considered closing their businesses, retiring, or leaving the UK entirely.
Brian Rudkin, director and head of employer services at Johnston Carmichael, believes the return to the old way of working will be a “welcome announcement” for many.
He said: “The rules that were introduced in April 2021 are overly complex and unworkable in many areas and are currently a real burden for all involved. We all expected a “review” but this this goes many steps further.
“However, it is too early to say what impact this will have on how businesses will engage contractors going forward.
“It will be important to understand the Government’s intentions on how IR35 will be policed going forward, whether any additional legislation around employment status will be introduced to manage compliance risk for the Government, and also how other regulations on the use of supply chains and corporate governance will shape the policies of engagers beyond April 2023.”
Reversal will ‘unlock’ flexible workforce
The timing of Mr Kwarteng’s decision is apt, given many oil and gas firms are already struggling to attract workers.
A contraction in the resource pool has left companies scrabbling to plug employment gaps, and there are fears it could get worse as offshore activity increase.
Matt Fryer, managing director of Brookson Group, said: “This has been a windfall mini-budget for contractors, with a series of very practical tax cuts improving take home pay for both independent personal service companies and those operating under umbrellas.”
He added: “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 energy and engineering. It does not, however, remove all compliance risk from resourcing contingent workers and for the workers themselves it creates an additional burden of administration.
“There is now likely to be a significant shift in the market away from umbrella employment and back towards personal service companies, which offer better take-home pay. This comes with a health warning, though. From April 2023 the responsibility for tax compliance will be placed firmly back on the shoulders of the self-employed, with HMRC also shifting focus back onto individuals.”