Changes to IR35 Off-Payroll Working Rules: What You Should Know

As we move closer to the beginning of the new financial year, let’s address one of the biggest developments in the UK tax system in recent times. The IR35 off-payroll working reforms brought into effect by previous Chancellor Kwasi Kwarteng in 2021 are all set to be reversed with effect from April 2023. The development was announced by Chancellor Jeremy Hunt in 2022, taking the rule back to the directive in place in 2000.

The change will put the responsibility back on workers (contractors) to determine their employment status and pay income tax and National Insurance contributions accordingly. Along with workers, the development will be a major shift for accountants, personal tax experts, and outsourced payroll providers UK.

Understanding IR35: The What, Who, and Why

IR35 or off-payroll working rules apply to workers (sometimes referred to as contractors) who provide services to clients through their own limited company or any intermediary. An intermediary may refer to an agency, a partnership, or an individual.

The rules are directed to make sure that workers, who would have qualified as employees if they were providing services directly to the client, pay the applicable income tax and National Insurance contributions as employees. In this case, the ‘client’ is the organisation that receives services from the worker through the latter’s own company or an intermediary. Clients may also be referred to as hirers or end clients.

In simple terms, IR35 is for those individuals (workers/contractors) who are not on the direct payroll of the client they serve. These workers still qualify for income tax and other relevant contributions to HMRC. Since HR departments and UK payroll outsourcing providers only consider employees on their company’s/clients’ direct payroll, there is a need for a separate set of rules for off-payroll workers, which is summed up as IR35.

Current Off-Payroll Working Rules: The 2021 Reforms

The current off-payroll working rules, practised in accordance with the 2021 reforms, put the onus of determining a worker’s employment status on the end client. For instance, if an organisation hires a contractor through an intermediary, it is responsible for determining the contractor’s tax status.

Once the employment and tax status are determined, the organisation or the intermediary, whoever is paying the contractor, must account for and pay the relevant tax and National Insurance contribution to HMRC. Accountants working with clients that engage contractors qualifying for IR35 must ensure they account for this pay. If you partner with an outsourced payroll provider UK, ensure you relay all the necessary information to them.

This rule applies to public sector organisations and all medium and large-sized businesses outside the public sector that seek services from individual workers through the means of intermediaries.

What’s Changing from 6 April 2023?

The new set of off-payroll working rules proposed by Chancellor Jeremy Hunt as a part of ‘The Growth Plan’ would come into effect from 6 April 2023. Any services provided before this date will follow the current rules, i.e., the 2021 reforms, even if the payment is made on or after 6 April 2023.

The new IR35 rules reverse the previous reforms, putting the onus back on workers to determine their employment status and pay appropriate taxes and National Insurance contributions. Organisations, therefore, can engage contractors through intermediaries without facing the burden of accounting for their taxes.

The reversal, one of the biggest developments in the history of UK taxation, doesn’t abolish IR35 but takes us back to the rules that existed back in 2000. It will deliver substantial time and administration savings for engager firms, accountants and payroll outsourcing providers.

What to Expect Next?

The 2017 and 2021 reforms put additional responsibility on organisations to account for the tax eligibility of contractors. Consequently, an HMRC research reported that over 41% of organisations began working with fewer off-payroll contractors than they did before. However, with the rules being reversed, we may see a rise in the number of organisations engaging contractors for a range of services.

On the other hand, since the onus of determining tax eligibility now lies with contractors, the latter may choose to become employees of organisations other than their freelance companies. These organisations include employer firms, agencies, or umbrella companies. This way, the income tax and NIC payments are taken care of by the organisation’s payroll department or an external payroll outsourcing services provider, taking the burden off workers.

To better understand the off-payroll working rules (IR35), log on to Understanding off-payroll working (IR35). For any payroll outsourcing support in the UK, connect with us at +44 208-146-0808 or email us at [email protected].