Autumn budget preview: Jeremy Hunt must ‘clarify’ ambiguous IR35 rules

Chancellor Jeremy Hunt must “clarify” IR35 reforms in the Autumn Budget on Thursday, according to Andrew Timpson, a specialist tax partner at RSM UK.

“I absolutely do feel that [the Chancellor] needs some clarity around the IR35 rules, the confusion and ambiguity that has been raised from the repeal announcement on September 23 followed by the repeal of that by Jeremy Hunt in his statement.

“The clarity needs to come through, there is too much confusion within companies now as to whether these rules are actually being abolished or not.”

As part of the UK Government’s ‘Growth Plan’ outlined in September’s mini-Budget, then Chancellor Kwasi Kwarteng laid out plans to repeal the 2017 and 2021 changes to the off-payroll working rules (IR35) in an effort to simplify the UK tax system.

But a month later, Hunt delivered a surprise economic statement effectively reversing a raft of measures outlined by his predecessor. Among them the decision to repeal the 2017 and 2021 reforms to the IR35 off-payroll working rules. Clarity is needed on whether “we’re going back to the pre-2021 and 2017 era”, says Timpson, noting that a review of IR35 reforms is needed.

However, any review must focus on the simplification of the assessment and process, as well as cost of compliance for businesses, says Timpson.

Broken promises

There is speculation that the Chancellor, in an effort to plug the £60bn fiscal hole, is considering raising the dividend tax rate and cutting the tax-free allowance for dividends.

Seb Maley, CEO of IR35 specialist consultancy firm Qdos, argues that such a move would be “short-sighted and counterintuitive” with increasing the tax burden on millions of small business owners.

“Having U-turned on the IR35 reform repeal, the government has broken promise after promise,” says Maley. “Now is not the time to inflict more pain on the self-employed, who hold the key to the economic recovery.”

Tax hikes and spending cuts

Prime Minister Rishi Sunak and the Chancellor are expected to outline £35bn in spending cuts and £25bn in tax hikes to fill the £60bn financial hole in public finances.

The Chancellor is considering cutting capital gains tax allowances and reliefs – a move that could raise around £455m a year for government coffers.

Praveen Gupta, national head of tax at Azets, hit out at the potential reforms to capital gains, saying: “[Office for National Statistics] data published in August 2022 highlighted the minority of individual taxpayers involved in making the greatest contribution to Capital Gains Tax (CGT).

In 2020/21, 45% of CGT came from those who made gains of more than £5m, according to Gupta, with this segment representing less than 1% of taxpayers. Meanwhile, 47% of gains for CGT came from 13% of individuals with taxable income above £150,000, she added.

Similarly, RSM argued in a statement that increasing CGT rates “may not go down well” with traditional Conservative party voters, pointing out that the tax only makes up a “small proportion” of the total tax take.

However, such a change may provoke a “short-term increase in tax receipts as taxpayers realise gains to lock in current rates”, the statement added.

According to RSM UK economist Tom Pugh, a drop in GDP of around 2.5% suggests that the UK is “probably already in a recession”.

“I think the biggest risk is that he [Hunt] actually goes further than he needs [in the Autumn budget], makes that recession worse, cuts capital spending by much more than he needs, to dump into the recovery,” Pugh added.