The UK government has announced plans to repeal the controversial reform to off-payroll taxation, a set of rules which applied to IT contractors who move between companies.
Speaking during his “mini-budget” in the House of Commons today, chancellor of the Exchequer Kwasi Kwarteng said reforms to the off-payroll working had added unnecessary complexity and cost for many businesses.
“As promised by the prime minister, we will repeal the 2017 and 2021 reforms. We will continue to keep compliance closely under review,” Kwarteng told MPs.
IT contractors may be relieved the reforms to the tax rules are set to be repealed but would be forgiven for being bewildered at the U-turn and the needless paperwork accommodating the reforms have introduced.
New IR35 rules were introduced for businesses in April 2022 following a year’s delay caused by the COVID-19 pandemic. They put the onus on determining tax status on employers, some of which were unwilling to accept the risk and put blanket bans on the use of contractors. The rules were introduced in the public sector in 2017.
Commenting on the move to repeal the legislation, Dave Chaplin, CEO of tax compliance firm IR35 Shield, said contractors would be celebrating the government announcement.
“These onerous reforms were never going to work and were flawed from the start. 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.”
But Penny Simmons, legal director at law firm Pinsent Masons said the government’s decision does not necessarily mean the end of the IR35 story.
“The rules will still exist – it’s just that contractors will once again be responsible for compliance and payment of tax. Businesses will remain exposed to tax risks if they pay contractors off-payroll when they know that the contractors should be taxed as employees by virtue of other tax rules and the corporate criminal tax offences.”
She pointed out that the chancellor has also said the government would keep compliance under review.
“The rules were changed because HMRC thought 90 percent of contractors weren’t applying the rules correctly – so if HMRC thinks this is still the case, we may well see further changes, albeit in a different form,” she said.
Over in the US, there are two main types of contractors: those who fall under 1099 (Form 1099-Misc), and those who fall under Form W-2, with the latter being similar to IR35 in the UK. However, there are major differences. According to contractor and freelancer news site, contractor.com, the main difference is “in the UK, the contractor is financially punished if found to be a disguised employee, whereas in the USA, it’s the client that is penalized. ®