What does the repeal of IR35 mean for businesses and contractors?

The IR35 and off-payroll working rules, which affect how contractors operating through a personal service company (PSC) are classed and taxed, will be repealed in April 2023.

Under the most recent reforms, IR35 in the private sector limited the way that contractors and freelancers could work in medium and large companies as employees through an intermediary PSC, which would typically be their own private companies.

When was the legislation introduced?

The off-payroll working rules came into effect for contractors working in the public sector in April 2000.

The rules were introduced by HM Revenue & Customs (HMRC) to try to prevent disguised employment and to determine whether a non-payroll worker should be classed and treated as a contractor or employee.

It was designed to ensure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance contributions (NIC) as an employee on the payroll.

In 2017, HMRC transferred responsibility for assessing whether someone was acting as an employee in the public sector from the individual contractor to the organisation that engaged their services.

Similar rules were then applied to the private sector in April 2021 to medium and large businesses.

The impact of IR35

This rule change resulted in many businesses reducing their use of contractors or applying blanket determinations to all contractors to ensure they were compliant.

As a result, two things happened, the number of contractors shrunk and many of the remaining contractors increased their fees to account for the changes in taxation and National Insurance where they were deemed to be inside IR35.

What the repealing of IR35 means for contractors

The repeal of these rules means that the contractor will, from April next year, be responsible for determining their status and ensuring that they pay the correct amount of tax and NIC for the services provided.

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