UPDATE: Jeremy Hunt, the current Chancellor, announced on 17 October 2022 that the decision to repeal the IR35 reforms of 2017 and 2021 will be reversed and the IR35 regime shall remain in its current form. This means the burden to undertake a status determination for individuals engaged through an intermediary will remain with the end user.
In the so-called “mini-budget” on 23 September 2023 there were two announcements in very quick succession from Kwasi Kwarteng which will have made employers and HR professionals sit up and take note. The first related to The Retained EU Law (Revocation and Reform) Bill 2022 published on 22 September 2022 which provides for an automatic “sunset” of the application EU Regulations in the UK in December 2023, which could have potentially wide ranging knock on effects on UK employment law. The second was the repeal of the 2017 and 2021 reforms to off-payroll working rules, better known as “IR35”, in April 2023. We discuss below what employers can expect as a result of these announcements and what practical steps employers can take now to prepare themselves to these changes.
Repeal of IR35 reform
Background: The Regime
IR35 is a tax regime which requires individuals engaged by a business through a personal service company (PSC) to undertake a status determination to establish whether the individual should be taxed as an employee or a self-employed contractor. In April 2021, the government reformed the regime to move the burden of conducting the status determination, and the subsequent account of tax to HMRC, from the PSC to the end user, namely the business engaging the individual, where that end user was a medium or large business. This mirrored the reforms that had been implemented in the public sector in 2017 and the effect that was that many employers engaged individuals as workers or employees to err on the side of caution, or refused to engage individual contractors through PSCs, to mitigate the risk of fines and penalties from HMRC, or allegations of tax evasion, for incorrect tax treatment.
The April 2023 Repeal
Kwasi Kwarteng said in his speech on 23 September that these reforms had “added unnecessary complexity and cost for many businesses”. Many businesses will no doubt agree with this statement and will welcome the burden of taxation and status determination of individuals to be placed back with the PSC. Indeed, it is expected that the repeal of the 2021 reform of the IR35 regime is likely to result in many individuals moving back to providing their services through a PSC due to the tax benefits these arrangements bring.
However, employers should be careful not to disregard the IR35 regime in its entirety once the burden shifts back to the PSCs. There are a number of considerations that businesses will need to continue to bear in mind for now, namely:
- The reforms are not being repealed until April 2023, meaning that, for now, the burden to ensure that individuals engaged in a business are being treated appropriately for tax purposes still lies with the end user; and
- At present, it is not expected that the repeal with apply retrospectively so enforcement action for the period between 2021 and 2023 may still be taken against end users even once the reforms have been repealed;
- While the 2021 reforms to IR35 are being repealed, the IR35 regime itself requiring a status determination to be done will still apply, as will a business’s obligation to prevent the facilitation of tax evasion in supply chains under the Criminal Finances Act 2017. As such end users will still need to give careful consideration to the correct tax status of the individuals they engage, particularly those who are deemed employed but seek to renegotiate the arrangement to provide their services through a PSC from April 2023.
We recommend that employers start to plan for the repeal of the IR35 reforms now but conducting an audit of the individuals this may affect and their compliance with the IR35 regime to date.
Sunset on EU Regulations
The Chancellor also announced that he will be requiring all departments to review, replace or repeal all retained EU law before its automatic expiry in December 2023 as a result of the Retained EU Law (Revocation and Reform) Bill 2022. Many key employment rights and regulations are routed in retained EU legislation including the Working Time Regulations 1998, which sets out limitations on working time and the right to paid holiday, the Agency Workers Regulations 2010, legislation preventing less favourable treatment of part-time workers and fixed-term employees and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).
It is not clear which elements of retained EU law will simply be reviewed and then enshrined into UK legislation and which will be allowed to expire. Clearly, given that the regulations above are widely relied upon for a significant proportion of the laws protecting employees in the UK, the decisions that will be made in the next 15 months will have potentially wide reaching ramifications for both employers and employees alike.
We will keep our clients up to date with the latest developments in this area as announcements are made. If you have any questions as to how the changes announced in the budget will affect your business, please contact Anna Bithrey in our Employment team by email or by calling 01582 731161.