Hunt ditches changes to IR35 tax rule

A relatively minor change put forward by Kwasi Kwarteng in his now-defunct mini-Budget was a proposed adjustment to the IR35 tax rule.

HMRC bought in the IR35 tax rule in 1999 aiming to clamp down on individuals – mainly contractors and freelancers – who work in a similar manner to an employee, but under the structure of a limited company.

By working through a limited company it’s possible for individuals to lower their tax burden as they don’t have to pay national insurance (NI) or income tax. Initially, the burden fell on the employee to assess whether they fell under the IR35 tax rule.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

However, that changed in 2017 when the government made public sector employers responsible for determining contractors’ IR35 status. In 2021, this was extended to employers in the private sector.

IR35 tax rule changes are being scrapped

Kwarteng wanted to reduce the burden on employers as part of his growth plan. He wanted to go back to the old system where employees were responsible for managing their own tax positions.

Jeremy Hunt has decided to reverse this decision. The changes brought in last year will remain in place and bring in an extra £2bn a year in tax revenue, according to Treasury projections.

The decision to retain this piece of burdensome regulation has been criticised by those who are affected.

Dave Chaplin, CEO of tax compliance firm IR35 Shield, said: "Repealing off-payroll would have returned an essential level of certainty to contract transactions in the market economy, leading to economic growth. Instead, off-payroll will continue to cause significant harm to the self-employed, major businesses, the government, and the economy.”

Rule change will lead to more tax collection

The IR35 tax rule is one of the most contentious pieces of regulation the government has introduced in recent years.

Put simply, the rules define contractors’ employment status based on a set of principles such as working for a single employer or having little discretion about when and where they work.

Employees that are deemed to fall within the scope of IR35 (and thus qualify as being employed) have to pay employment taxes – income tax and national insurance – through PAYE like all other employees.

Campaigners argue that companies have reacted by pushing all contractors into the scope of the rules – lumping them with higher taxes – rather than risk falling foul of HMRC.

And companies are right to be worried: HMRC has become quite aggressive when policing the IR35 tax rule. That could be because some estimates suggest less than 10% of contractors pay the right amount of tax.

Now Hunt has scrapped Kwarteng’s proposed changes, it looks as if the fight between contractors and HMRC will continue.