Mini Budget 2022: IR35 reforms to be repealed

Chancellor Kwasi Kwarteng has announced that the UK government will scrap the 2017 and 2021 reforms to the IR35 off-payroll working rules.

“Reforms to off payroll working have added unnecessary complexity and cost for many businesses,” said Kwarteng, addressing the House of Commons during his ‘mini’ Budget statement on Friday morning (September 23).

The decision to scrap IR35 reforms has been celebrated by Seb Maley, CEO of IR35 specialist consultancy firm Qdos. The move is likely to go down as one of the most “pro contracting” measures in memory, he said.

“Repealing IR35 reform is a huge victory for contractors. The changes have created havoc for hundreds of thousands of independent workers, along with the businesses that engage them.”

However, Maley also advised a prudent approach from the government, warning that work must still be done to establish clarity over how the system will develop for contractors.

“The government mustn’t waste time. The last thing contractors and businesses impacted by IR35 need is uncertainty. A clear and robust roadmap for reversing IR35 reform in both the public and private sectors is needed.”

This was echoed by Tim Walford Fitzgerald, private client partner at accountancy firm HW Fisher. The Chancellor’s decision is a “huge move” that will offer “freedom” to contractors, he said.

“Cutting the red tape around off pay-roll working is a huge move by the Chancellor and should help to massively simplify the tax process for businesses and offer greater freedom to contractors.

“It’s certainly a welcome reversal to a regime that previously led to cautious and time-limited clients making deductions that may have been entirely unwarranted if truly objective reviews of both contracts and actual practices could have been undertaken.”

IR35 reform in the public sector introduced in 2017 saw public sector bodies become responsible for determining the IR35 status of contractors – the responsibility shifted from the contractor to the end client. Alongside this, the liability shifted from the contractor to the fee-paying party (often the recruiter) in the supply chain.

IR35 reform in the private sector in 2021 mirrored this but applied only to medium and large businesses. Small companies remained exempt.

‘The power of the private sector’

The abolition of the the reforms formed part of a wider tax-cutting and pro-business agenda, matching the tone set by Liz Truss during her first weeks as prime minister.

“There are too many barriers for enterprise – we need to break them down. That means reforming the supply side of the economy,” Kwarteng said.

Most notably, the Chancellor announced that the UK’s corporation tax rate will remain at 19% – the lowest in the G20. This means a cancellation of the planned rise to 25%, which was due to take effect in April 2023.

According to Kwarteng, the move will funnel almost £19bn back into the UK economy.

In addition, the government took the decision earlier in the week to reverse Rishi Sunak’s planned health and social care levy and 1.25% increase to National Insurance (NI) contributions.

As a result, businesses stand to benefit not only from lower taxation of profits, but also from lower overheads on staff.

“If we really want to level up, we have to unleash the power of the private sector,” Kwarteng said.

“It’s businesses that invest in the products and services we rely on. Every tax on businesses is ultimately passes on to individuals.”

The Chancellor also unveiled the planned creation of new “investment zones” across the UK. Businesses in the designated tax sites will enjoy accelerated reliefs on structures, buildings and manufacturing apparatus, in addition to reduced business rates and national insurance contributions.

“We will have one of the most competitive and pro-growth tax systems in the world,” Kwarteng remarked, adding that early discussions are in place with nearly 40 regions to establish the zones.

But according to Simon Crookston, partner at accounting firm Crowe UK, Kwarteng has passed up the opportunity to be “bold” and further incentivise innovation in businesses beyond the new zones.

“The Chancellor should have been bold and provided greater incentives for businesses to be innovative and invest. For those businesses not in the zones, there is limited additional support.”

Crookston also lamented the lack of climate focus in the mini-Budget, arguing that incentivising green infrastructure should be a priority for the government.

“It is a real shame that the Chancellor did not provide incentives to encourage further investment in solar, wind, water turbines and other green initiatives.

“We need to radically change our approach in the current energy crisis and the Chancellor seems to have ignored this in his new approach for a new era.”

Growth… but at what cost?

Much criticism has also been levelled at the government’s approach to fiscal responsibility. While the clear theme of Kwarteng’s maiden budget has been the stimulation of growth, many feel that the level of borrowing required could paint a grim long-term picture for the UK’s economic stability.

For instance, a new report conducted by the Institute for Fiscal Studies concluded that the UK’s borrowing levels are set to be £60bn per year higher than the Office for Budget Responsibility’s (OBR) March 2022 forecast.

Similarly, figures released on Wednesday showed that the UK government borrow £11.8bn in August – almost twice the amount estimated by the OBR earlier this year.

The figures also showed that debt interest payable by central government rose to £8.2bn last month – the highest August figure since records began in 1997.

According to Carys Roberts, director of the Institute for Public Policy Research, this economic picture will only be exacerbated by Kwarteng’s “sugar rush” budget.

“By vastly expanding government borrowing for no clear economic gain, it will only reduce the scope for the investment our economy really needs,” he said.

“Cutting a whole string of different taxes may provide a sugar rush of immediate growth, but this will quickly fade away. These are the wrong policies to drive broadly-shared and sustainable growth.”

But during his Statement, the Chancellor remarked that “growth is not as high as it should be”, and that its is “entirely appropriate for the government to use its borrowing powers to help people”.

As a result of the measures announced this week, inflation will be reduced by five percentage points, while annual growth will rise to 2.5% of the economy, Kwarteng argued.

“The price of inflation would have been far greater than the cost of these schemes.”