During his first mini-budget delivered to the House of Commons, Chancellor Kwasi Kwarteng announced that the Government would be repealing some of the recent reforms to IR35.
As part of the Government's Growth Plan 2022, the Chancellor set out the plan to scrap the off-payroll rules introduced in 2017 and 2021 by April 2023.
The two sets of legislation were brought in to tackle tax avoidance by businesses and the workers they hire, but proved unpopular and were thought by contractor groups to be overly complex.
As of next year, the responsibility for determining someone's IR35 status will fall solely on the worker instead of the business hiring them through an intermediary.
During his announcement, the Chancellor said:
"We can also simplify the IR35 rules, and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.
"Of course, we will continue to keep compliance closely under review."
What the changes mean for businesses
With IR35 returning to the original rules set out in 2000, employers will no longer need to spend time ensuring a contractor's tax status aligns with the work being carried out.
This also means the onus of paying National Insurance contributions (NICs) and income tax will be the sole responsibility of the worker unless they are inside IR35 and providing their services directly to the employer. They will then be seen as an employee, meaning the employer will pay NICs.
Although these main rules are being repealed, businesses will still be responsible for ensuring the contractors they hire aren't involved in tax avoidance. Any company which hires a contractor suspected of avoiding the IR35 rules could still be held responsible.
Businesses working with individuals will remain responsible for assessing employment status if the worker isn't operating via an intermediary such as a limited company.
Businesses hiring contractors to carry out work will need to reassess the original IR35 rules from 2000.
As a preventative measure, to avoid being punished by HMRC for non-compliance issues, businesses should retain comprehensive records of their contracted workers and their IR35 status.
Industry reactions
The repeal of the IR35 rules has been met with both praise and criticism, with many believing that it will lessen the pressure on businesses to determine workers' status but add that pressure back onto the contractors.
Susan Ball, president of the Chartered Institute of Taxation, said:
"While reversing the 2017 and 2021 off-payroll working rules will significantly reduce compliance burdens for big business, it does not solve the problem of IR35. Instead, it places the compliance burden back on small independent contractors and freelancers.
"This will likely lead to either widespread non-compliance, as happened under the old IR35 rules, and as evidenced by the Government's figures which suggest up to £2 billion will be lost each year, or to costly compliance activities for HMRC and a lot of pain for contractors having to defend their status assessments or face significant penalties from misunderstanding complex rules."
Shevaun Havilland of the British Chambers of Commerce (BCC) welcomed the Chancellor's decision, saying the changes will bring more flexibility to the industry and help the labour market.
Talk to us for advice on IR35 and off-payroll working.