Government scraps plan to repeal IR35 tax reforms

Kwasi Kwarteng said last month that the system would return to its original rules from April 2023, requiring independent contractors to calculate their own taxes

Jeremy Hunt, the new Chancellor of the Exchequer, has reversed the plans to abolish the controversial Off-payroll IR35 Reforms, which the previous Chancellor Kwasi Kwarteng announced in his mini-budget on 23 September 2022.

The government's U-turn came as Hunt tore up almost all tax measures announced in Kwarteng's"Growth Plan".

The Growth Plan had outlined initiatives to simplify the tax structure and noted the need to abolish the IR35 Reforms of 2017 and 2021.

Kwarteng said last month that from April 2023, independent contractors would to calculate their own taxes, as they did before IR35.

Repeal would "free up time and money for businesses that engage contractors, that could be put towards other priorities," the Conservatives stated.

However, Hunt has decided to no longer pursue those measures.

After the mini-budget was met with disapproval by the financial markets, Hunt said that maintaining economic stability is a key duty of all governments, and that the government "will no longer be proceeding with the reversal of off-payroll working reforms."

"The reforms will now remain in place," the HMRC stated. "This will cut the cost of the government's Growth Plan by around £2 billion a year."

The changes to the off-payroll working rules, commonly known as IR35, were rolled out to the public sector in 2017, and the private sector in April 2021. The change made medium and large-sized private and public sector organisations responsible for determining the employment status of the contractors they engage, for tax purposes.

Under previous IR35 rules, which were in place for nearly 20 years, contractors were allowed to self-declare their tax liabilities.

The government's own departments have struggled with IR35 changes.

The HMRC came under fire earlier this year after a report from the National Audit Office (NAO) found that the agency was collecting more tax than it was due.

"The government's initial commitment to repealing the off-payroll rules was a sensible initiative," said Dave Chaplin, chief executive officer of tax compliance firm IR35 Shield.

"The Conservatives U-turn on the repeal has thrown around half of the genuinely self-employed contractors under the bus, and likely kissed goodbye to their success at the next general election," he said.

Without reform, Chaplin said, the present off-payroll rules would be detrimental to the economy.

"Repealing off-payroll would have returned an essential level of certainty to contract transactions in the market economy, leading to economic growth. Instead, off-payroll will continue to cause significant harm to the self-employed, major businesses, the government, and the economy."

Matt Fryer, MD of accounting firm Brookson Group, said: "Uncertainty isn't helpful for hirers or contractors, particularly in today's economic climate. At least retaining the current off payroll working rules takes us back to the position we were in a few weeks ago and gives us a bit of certainty. However, it is clear now that the government acknowledges the current rules aren't working as expected."

"If the rules stay in place exactly as they are, more needs to be done by HMRC in terms of education and support for the entire flexible labour market," he added.

However, Paul Johnson, head of the Institute for Fiscal Studies, called the now-abandoned changes a "tax evaders charter" in a tweet and said he was glad they were not going ahead.