What the IR35 reforms repeal will mean for contractors and employers

The controversial IR35 rules were highly criticised by both employers and the contractor workforce since their introduction to the public sector in 2017, and then to the private sector in 2021.

The reforms meant that businesses and end-clients would decide if the working relationship resembled a self-employed engagement or employment. This complicated the procedure for companies looking to hire contractors, as many argued that it added an unnecessary burden to the process. As a result, contractors had less opportunities, and many businesses were unwilling to hire contingent employees due to the complexities that had been added.

The government’s reasoning behind the implementation was to track down so-called ‘disguised employees’ – contractors who take on the responsibilities of a permanent employee and would be considered as such had they not been connected to the business through their limited company.

Though, as a result of the new rules, a survey found that 52% of firms had lost more than half of their contractor workforce because of the complications that the reforms introduced. In addition to this, 23% of contractors were planning to quit contracting altogether, and 21% intended to change career paths, demonstrating the negative impact that the IR35 reforms had for both parties.

Recent developments have revealed the government’s intention to repeal the Off-Payroll Working Rules, in an effort to simplify this process. Chancellor Kwasi Kwarteng announced this as part of his mini-Budget, and this is expected to alter the employment market significantly for candidates and clients alike.

How are the rules changing?

The Chancellor stated that he hopes that this return to form will “minimise the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.” As a result, from April 2023, role-based determinations from businesses will no longer be a legal requirement.

This means that contractors will once again have the responsibility of determining their own tax liabilities, in addition to their National Insurance, rather than this being in the hands of the firms that are using their services.

Considering that 35% of contractors had left self-employment as a result of the 2021 reforms, this simplification will allow for an increase in engagement between companies and contractors.

However, IR35 has not been abolished in its entirety. The repeal of the rules means that it will simply revert back to its original format under Chapter 8 ITEPA 2003, and the existing Intermediaries Legislation will apply. It will be repealed in both the public and private sector, and the changes will pertain to all work that is done up to April 2023.

Who is liable?

Self-employed individuals who work through a separate company will be the main people affected by the repeal of the IR35 rules, as many were deterred from contracting due to the reduction in opportunities available to them. This was likely caused by day rates being higher than they’d ever been as a result of the reforms, and the unwillingness of businesses to pay more for contingent workers. This had a huge impact on the pay of contractors, which explains why such a vast number of contractors had ultimately decided to leave self-employment.

In addition to this, when the initial reforms were introduced, 80% of contractors working within IR35 had stated that their quarterly income had decreased. To make matters worse, 64% of these individuals had cited this decrease as a significant amount, demonstrating the negative impact that these reforms had on contractors’ pay.

In turn, the reversal of the rules will also have an impact on employers, meaning that they will have an easier time engaging with contractors, but also have a harder time holding onto their contractor workforce, as the opportunities available for contractors will expand.

What this means for contractors

When the legislation was introduced, it added an additional step to the engagement between businesses and contractors. This made the working relationship between contractors and companies much more complex, and many contractors became underutilised by firms.

As a result of the repeal, businesses and contractors will likely be engaging in more frequent business together, as the process won’t be as complex or expensive. They’ll also both be granted with extra time that could be used to focus on other priorities, simplifying the onboarding process overall.

The demand for contractors is expected to increase, which is great news, as they’ll once again have the opportunity to receive a better take-home pay. 

What this means for employers

Due to this new demand, contractors, in addition to ex-contractors, may now be reassessing options and looking to move back to limited company contracting. As a result, it’s crucial for employers to look to implement strategies to hold onto this demographic of their workforce.

Additionally, businesses will no longer have to rely on blanket assessments; declaring that their entire contractor workforce are ‘inside IR35’. This would consist of classifying all their self-employed workers as employees of the company, having a negative impact on these contractors’ tax-wise. Now that this responsibility has shifted back to the individual contractor, organisations will need to update and adapt their processes to fit the new legislation.

On a positive note, businesses will be freed from having to produce status determination statements (SDS), which took up a significant amount of their time. This removal of an extra stage will make acquiring professionals via limited companies quicker and more convenient, especially when it comes to hiring for critical, time-sensitive projects.

Going forward

There is no certainty concerning what the future of the employment market will look like, but for both employers and contractors, there are ways to prepare for the changes based on expectations.

From our perspective, we know that many employers will be unlikely to hire inside IR35 until the new ruling in 2023, so we encourage contractors to wait for the new ruling, rather than rushing to find a new project straight away.

Our advice overall is to take heed of the upcoming months without making any rash decisions, as there is no way to know what will happen post-April 2023. It’s crucial to seek as much guidance as you can when it comes to making any career-altering decisions, and if you’re looking for answers, please do not hesitate to get in touch with the Capstone team.

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Sam Lee

31st October

Industry News