Move back to old IR35 rules risks tax hit, warns ATT

In today’s Growth Plan 2022¹ the Chancellor announced that the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35)² would be repealed from 6 April 2023. From this date, the previous IR35 rules will once again apply, meaning it will be up to individual workers who provide their services through a personal service company (PSC) to decide whether the rules apply, and ensure the appropriate income tax and national insurance deductions are made.

Jon Stride, Vice-Chair of the ATT’s Technical Steering Group, said:

“While an announcement of a review of the off-payroll working rules was expected today, it is a shock that the recent reforms are being scrapped in their entirety.

“This is particularly surprising as these reforms were first introduced due to concerns that the previous IR35 rules could not be enforced by HMRC, leading to widespread non-compliance and significant loss of tax revenues.”

In a factsheet published in 2018,³ HM Treasury and HMRC stated that, at that time:

Only about 10 per cent of people who should comply with the IR35 rules were doing so.

The cost of non-compliance in the private sector was growing and would reach £1.2 billion a year by tax year 2022/23.

Jon Stride said:

“The recent off-payroll working reforms are proving controversial, and their repeal will no doubt be welcomed by some. But simply reversing these changes, without taking further steps to address the concerns which gave rise to them, means we will simply be back in the same position and facing the same problems.

“We encourage the Government to look again at how IR35 compliance can be improved. This may include simplifying the rules, increasing education and understanding and supporting and investing in new approaches to compliance activities in HMRC.”

Jon Stride said:

“One of the reasons why the IR35 rules were introduced in the first place was that the differing tax burdens placed on employment and self-employment led to distortions in the labour market, incentivising businesses to treat individuals as self-employed. We would therefore encourage the Government to take a bold approach and look at the wider issue of the distinctions in taxation between employees and the self-employed.  If these issues can be addressed, there may be less need for such complicated and controversial rules in the first place.”

Notes for editors

1. See https://www.gov.uk/government/publications/the-growth-plan-2022-documents

2. The IR35 rules were first introduced in 2000 in response to concerns that workers who engage with clients via their own companies (often referred to as personal service companies or PSCs for short) pay less income tax and NICs than those who are employed directly.  The IR35 rules, when applied correctly, ensure that individuals who work through a PSC that would have been employees if directly engaged, pay broadly the same income tax and NICs as if they were employees.  It was down to the individual worker to decide if the rules applied and, if so, for the PSC to pay the appropriate payroll taxes.

In response to concerns that the IR35 rules were not working effectively, and that non-compliance was widespread, new rules were introduced for the public sector in April 2017 and the private sector in 2021.  Under these rules, the responsibility is taken out of the PSC’s hands, and instead businesses engaging workers through a PSC are required to determine whether the rules apply. The fee payer (which may be the engager itself or an agency depending on the arrangements used) is then required to deduct payroll taxes on the payments made to the PSC.



3. See: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/707809/IR35_Factsheet.pdf