What Could a Repeal of IR35 Reform Mean for Your Business?

In the months since the IR35 reforms took effect in the private sector – pushing the burden of classification of contractors on to the end user, rather than the contractor – businesses have seen a big shift in costs of hiring contingent labour. Most companies saw an increase in ‘inside’ IR35 contracts, and many had to make commercial decisions over contractors moving from outside to inside IR35 as they juggled retaining talent with take-home pay and the increased administrative burdens of compliance with IR35. 

The news that the government intends to repeal the changes is broadly good for businesses. Although it has come after a great deal of organisational and process change, businesses may, with effect from April 2023, return to concentrating on engaging talent.

There are a few things to consider though before businesses make plans to pull back on the added due diligence and processes for making a status determination.

What should businesses know about a repeal of IR35?

There is no guarantee yet that this change will happen in April 2023.

Any reforms will have to go through the legislative process to repeal the changes ushered in by the Finance Act 2017. So, although the intent is there, it will only be certain once Chapter 10 Part 2 of the Income Taxes (Earnings and Pensions) Act 2003 (ITEPA), as amended, has actually been removed from the statute book. We simply don’t know whether this latest policy reversal will suffer a further U-turn in the meantime.

The proposed legislative reversal does not mean that the risk is reduced.

In fact, the onus of providing a correct status determination will shift back to the contractor – as will the fines and penalties that His Majesty’s Revenue and Customs (HMRC) may seek to impose if they query why an ‘inside IR35’ contractor suddenly decides that they should now be ‘outside IR35’. But simply reversing a status determination from ‘outside IR35’ to ‘inside IR35’ could be problematic where the role is effectively the same.

Employment businesses must tread carefully.

By using contractors who provide services via their own personal services company or businesses may risk breaching separate anti-tax avoidance rules, in particular the 2007 managed service company legislation or the 2017 Criminal Finance Act. Whilst this looks like positive news for contractors, the government could increase other revenue-generating measures such as higher corporation tax or other fiscal measures to compensate for a loss in income tax receipts. Then again, they might not. In 2021, the HRMC estimated that £1.4 billion of revenue for HMRC would be generated by clamping down on perceived tax avoidance. It’s unlikely this gap in finances will remain unplugged for long given the current economic climate.

Assuming this all goes ahead as revealed, some key considerations will need to be made.

Key Considerations 

1. For businesses that chose to increase or compensate contractors for the lower take home pay – would they look to reverse this? That question may well need to wait for 2023 and what next year will hold. Furthermore, how often will rates be reviewed, and which sectors will be impacted?
   
   
2. Many contractors took the offer to take a permanent role in light of the reforms. Will this talent return to the contractor market and, if they do, what will this do to market rates? I’d imagine the answer will be sector- and skill-specific, but noting that since the reforms, the marketplace itself has moved on. Remote work, accessing talent from offshore locations etc. is all far more frictionless than before. One thing we know about the labour markets in the 2020s is that it’s full of innovation, challenges and external unforeseen circumstances.

The smart money is to watch this unfold (or perhaps unravel!) a little further first. At Allegis Global Solutions (AGS), we partner with our clients to access talent across multiple labour markets and in all forms of engagement. We help clients with their talent and labour business planning, and we can work with clients to help mitigate risk in this area. Contact us to learn more.

(Update: As of October 17, 2022, the proposed repeal of IR35 has been tabled by the new Chancellor of the Exchequer Jeremy Hunt. Learn more here.)