Off-payroll U-turn: New chancellor Jeremy Hunt rips up pledge to repeal IR35 reform

The new chancellor Jeremy Hunt has this morning reversed the government’s pledge to repeal IR35 reform, as part of a £31billion-a-year package to shore up the economy.

In a televised address to the nation, Mr Hunt said the Liz Truss-led government would “no longer be proceeding” with the reversal of the 2017 and 2021 off-payroll rules.

The chancellor also said that the dividend tax cut, similarly announced at mini-Budget 2022, is not going to go ahead either, in a move estimated to save the exchequer £1.4billion.

'Lost for words'

While the cancellation of the dividend tax cut will make extracting profits from a limited company more costly for contractors, it is the IR35 U-turn that has stunned the industry.

“I’m lost for words,” says Qdos’s Seb Maley, an IR35 contract reviewer.

“The chaos, uncertainty and disruption caused by the mini-Budget is unprecedented…[but] cancelling the repeal of IR35 reform is the wrong decision at the wrong time.”

'Fiasco'

Qdos’s CEO, Mr Maley characterised the announcement from Mr Hunt, who sounded nervous reading his statement this morning, as a “knee-jerk reaction from the government”.

“What a fiasco,” agrees IR35 specialist Rebecca Seeley Harris.

“While I can’t say I’m surprised, it will now be interesting to see whether they announce any sort of IR35 review [as Ms Truss promised in August 2022].

Boss at ReLegal Consulting, Seeley Harris said save for any follow-up announcements by Mr Hunt or HMRC this afternoon, it appears to be back to ‘business as usual’ for contractors.

'Nothing more than a eye-catcher'

A former tax inspector who now specialises in the Off-Payroll Working (OPW) rules confirmed:

“For PSCs it’s back to 'as you were' on September 22nd, the day before mini-Budget promised to axe the 2021 and 2017 reforms from April 2023,” began the ex-inspector, Kate Cottrell.

Co-founder of Bauer & Cottrell, she continued: “So forget the ‘yipees’ and ‘woo-hoos’ that went up on Sep 23rd. Repeal of the OPW rules was nothing more than an eye-catcher. 

“As things stand, it looks like the current rules – whereby the IR35 status decision is not the contractor’s decision unless the client is a small company -- will be with us for many years to come.”

'Glimmer of hope that's now been snatched away'

Continuing to prohibit contractors from deciding their own IR35 status ‘leaves the self-employed at the bottom of the pile,’ according to SJD Accountancy’s Joanne Thorne.

“The announcement of a reversal of IR35 [reform] at Kwasi Kwarteng’s mini Budget offered a glimmer of hope to contractors, which has [now] been snatched away,” she said, adding:

“It would likely have been difficult for the government to quantify the benefits of the repeal…[yet this decision is nonetheless] shocking”.

'Reversing IR35 reform repeal to cut the Growth Plan's cost by £2billion'

In a statement to ContractorUK, HM Treasury said keeping the 2017 and 2021 reforms in place will “cut the cost of the government’s ‘growth plan’ (the official name of Mr Kwarteng’s mini-budget) by around £2billion a year.

Contractor accountant Sid Agarwal is confused, given that only last month the then-boss of the Treasury told the House of Commons that the IR35 reforms imposed “unnecessary cost and complexity” on businesses.

“Repealing the off-payroll reforms was a step in the right direction to help the struggling contracting industry and for businesses to reduce their administration burden and attract [a] quality workforce,” says Mr Agarwal, a director at DNS Associates.

'Contracts commencing April 2023 will now be shelved'

CWC Solutions managing director Carolyn Walsh predicts: “The reversal of the revocation of IR35 reform will cause contracts, that were in the offing to start in April 2023, to be shelved.

“Some will be genuine B2B contracts that now can't go ahead because a company policy is in place that prevents a client from taking on the administrative burden and potential tax debt liability of engaging PSCs.

“Some agencies have been making hay [since the mini-Budget vowed contractors could self-determine IR35 status from April 2023] -- it's true, and that has probably now given the government all it needs to soon call 'tax abuse' and justify the U-turn.”

'Fundamentally flawed'

However, compliance expert Crawford Temple suggests that assuming that the Liz Truss-led government keeps to its word and reviews IR35, justifications might be hard to come by.

“The off-payroll rules that were rolled out to the public and private sectors in 2017 and 2021 were ill-thought-through and damaging for the UK economy,” begins Mr Temple, CEO of Professional Passport.

“It would appear that the government also recognises this by announcing the repeal. However that repeal is now not proceeding.

“The OPW rules were built on already fundamentally flawed IR35 legislation and so we now call for a considered approach and a proper review that Liz Truss promised as part of her ministerial campaign.”

'Disappointing IR35 reform is staying'

Chris Bryce, CEO of The Freelancer & Contractor Services Association, last week pointed out that the PM has only ever promised a review of the Intermediaries legislation.

Rather, it was her now-removed chancellor who vowed to repeal the revisions of 2017 and 2021 – a repeal which appeared to go against tax policy-making guidelines.

Nonetheless, Mr Bryce believes chancellor Hunt has made the wrong decision. “The scrapping of the rollback of the 2017 and 2021 IR35 rules is disappointing,” he said.

“This will add to the confusion in the contractor marketplace and will also do nothing to improve the agility and flexibility that contractors offer UK plc.”

'Off-payroll U-turn is bad for businesses, bad for contractors'

At CWC Solutions, Ms Walsh, a former Revenue inspector confirmed: “This U-turn by new chancellor Hunt will be bad for businesses and bad for genuine contractors, both of whom will have to find some other way to manage IR35 reform’s unwieldy elements.

“That’s assuming they wish to contract with each other, but from past experience and since the introduction of the 2021 reform especially, it often seems to be a bridge too far.”

As for practical advice going forward (HMT has been asked to provide guidance/materials this morning by ContractorUK), Cottrell offered:

“We all have to continue to live with the [reformed] rules and of course, there does remain genuine outside IR35 situations. 

“Hopefully most in the contractor industry took a ‘wait and see’ approach when this was first announced, and all should continue to take appropriate IR35 advice and seek certainty about their own positions. Unfortunately for the many individuals affected by this, getting rid of IR35 has turned out to be a lovely dream that was never going to come true.”