IR35 reforms reversed: what does it mean for the self-employed?

After promising to review IR35, Liz Truss’s government has gone further and repealed reforms introduced in 2017 and 2021.

The new chancellor, Kwasi Kwarteng, announced the surprise move as part of his mini-Budget on 23 September. But what does it mean in practice for contractors and the self-employed?

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What are the IR35 reforms?

HMRC’s off-payroll working rules determine whether a contractor or freelancer operating through their limited company is ‘genuinely’ self-employed for tax-paying purposes.

Historically, the self-employed worked out their own employment status. But HMRC introduced changes in the public sector in 2017, which made it the client’s responsibility to determine the contractor’s IR35 status.

HMRC then introduced this reform in the private sector in 2021, with some differences (for example, contractors who work with smaller clients are still responsible for working out their own status).

Read more about IR35’s story so far and what it means to be inside IR35.

So has the new government repealed IR35 entirely?

No. Rather than reversing IR35 rules as a whole, the new government aims to abolish the reforms of 2017 and 2021.

If the reversal goes ahead in April 2023 as planned, self-employed contractors and freelancers who work through their own limited company will once more be responsible for working out their own IR35 status.

Announcing the reversal, Kwasi Kwarteng said: “Reforms to off-payroll working have added unnecessary complexity and cost for many businesses.”

The government’s accompanying Growth Plan 2022 document says the change will allow “businesses to get on with business” and that tax simplification “will be embedded at the heart of the tax system as a core HM Treasury and HMRC priority.”

Self-employed groups welcome the reversal

Andy Chamberlain, director of policy at IPSE (the Association of Independent Professionals and the Self-Employed) said: “We are delighted that the new Chancellor agrees with what we have been saying for years – that the 2017 and 2021 reforms create unnecessary complexity for contractors and businesses. It is with huge relief that we welcome this dramatic shift in government thinking.”

Yet he doesn’t believe the reversal goes far enough: “We remain concerned that the underlying IR35 rules will stay in place, and we hope to work with the government to make further progress on this issue in the weeks and months ahead.”

Martin McTague, National Chair of the Federation of Small Businesses (FSB), said: “Scrapping these poorly thought-through, unnecessary and burdensome regulations at a time when we need more people to choose self-employment and start-up in business, is welcome. These restricted small businesses’ and self-employed people’s ability to do their work and contribute to the economy.”

But will the reversal definitely go ahead?

While positive about the announcement, Dave Chaplin, founder of contracting website Contractor Calculator, has sounded caution.

Firstly, he says that the government announcing tax changes “on a whim” without consultation may “unnerve firms seeking to invest in the UK."

Secondly, the reversal is still only a government aim and isn’t yet law. It will need to go through parliament in the usual way, drafted in the next Finance Bill.

Chaplin said: "From everything I learnt from six years of political campaigning and my knowledge from Erskine May on Parliamentary procedures, nothing is guaranteed until it reaches Royal Assent.

"For now, carry on as normal, but have a transition plan ready."

What do you think about the decision to reverse IR35 reform? Let us know in the comments below.