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Budget Bonfire: IT contractors wave goodbye to tax reprieve as IR35 retained

Chancellor Jeremy Hunt has torn up plans to abolish the unpopular “IR35” tax rules that affected many IT contractors, as part of a bonfire of Liz Truss government’s planned economic reforms delivered this morning.

The Chancellor today announced what government channels themselves freely described as “a reversal of almost all of the tax measures set out in the Growth Plan that have not been legislated for in parliament.”

(The "Growth Plan" refers to Prime Minister Liz Truss's "mini-budget" on September 23.)

IR35 makes employers rather than employees responsible for determining the tax status of contractors and became effective for the private sector in April 2020. It saw large businesses banned the use of contractors and “personal services companies” outright, forcing contractor IT staff into poorly regulated “umbrella” companies.

Others freely admit that they are not good at determining the status of contractors resulting in unnecessary confusion and inaccurate taxation and employment requirements for what should be freelance roles.

(The hacks of some of these umbrella companies which took over tax for contractors resulted in hugely damaging data breaches spanning passports, P60s, national insurance numbers and more, as covered by The Stack here.)

IR35 U-Turn: Bad news for IT contractors

Former Chancellor Kwasi Kwarteng may not have endeared himself to the markets but he did win friends in the IT contractor community with his planned abolition of IR35, which would have been effective April 2023.

The tax reforms have been widely damned including by both House of Lords and House of Commons committees.

Roll-out of the off-payroll rules even caused high levels of non-compliance across central government departments and agencies: Those found to have mis-applied them include HM Courts & Tribunals Service, resulting in a combined tax and NIC liability owed to HMRC to the tune of £263 million for tax year 2020/21.

One commented on the Off-Payroll LinkedIn page, where contractors have discussed so many of the changes: “Corp tax up to 25%, IR35 not repealed, income tax cut repealed, energy price plan gone after April 2023… It's hard not to worry where all this will end! I'm off to open my new companies in Panama and Jersey.

Hopes of an IR35 U-turn being avoided had not been high after the Kwarteng's sacking.

That’s despite a blistering House of Lord’s report in 2020 that warned the previous government had looked at the issue “too narrowly” and had “severely underestimated the costs to business of implementing the changes [and] did not analyse sufficiently the unintended behavioural consequences of the proposed reforms.”

A Public Accounts Committee report also found that "HMRC has no clear idea of the impact, true cost, or true benefit of enforcing IR35, and also has failed to provide a way for workers to challenge an incorrect assessment"

In bad news for those businesses concerned about energy prices meanwhile, the government said today that “looking beyond April, the Prime Minister and the Chancellor have agreed that it would be irresponsible for the government to continue exposing the public finances to unlimited volatility in international gas prices.

“A Treasury-led review will therefore be launched to consider how to support households and businesses with energy bills after April 2023. The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need… any support for businesses will be targeted to those most affected, and that the new approach will better incentivise energy efficiency.”