What does the IR35 reform repeal mean for umbrella employees?

As the newly appointed Chancellor stood up to make his mini-Budget statement on 23rd September, few would have predicted that he was about to announce that IR35 reform is to be repealed.

But to everyone’s surprise, Kwasi Kwarteng revealed that IR35 reform in both the public and private sectors will be reversed next April. While this made up just one of a raft of tax changes impacting contractors, the news was, without doubt, the key takeaway from this newly formed government’s first fiscal event.

In this article, we explain what this means for contractors and umbrella company employees.

What is going to change?

IR35 reform, which was rolled out in the public sector in 2017 and the private sector in 2021, will be reversed.

The changes had seen public sector bodies, as well as medium and large private sector firms, handed the responsibility for determining the IR35 status of contractors.

However, this duty will be transferred back to contractors, who will be tasked with assessing their IR35 status and liable for non-compliance once more.

When will IR35 reform be repealed?

The new changes will be introduced on 6th April 2023, which marks six years since the introduction of public sector reform and just two years after the roll-out of private sector changes.

Why is the government repealing IR35 reform?

The previous government, led by Boris Johnson, had often claimed that the changes had resulted in increased levels of compliance.

However, many critics – and contractors – maintained this was not the case. In his mini-Budget statement, the Chancellor himself referred to the “unnecessary complexity and cost for many businesses” caused by the reform.

Is IR35 itself being scrapped?

No. The reform is being repealed, not the rules themselves. IR35 itself will continue to exist post-April 2023 and will remain a consideration for contractors.

However, the reform – which transferred the responsibility for administering IR35 away from the contractor – is. Put differently, the IR35 rules will return to the way there were pre-2017 across the board.

How will the IR35 reform repeal affect umbrella employees?

IR35 doesn’t impact individuals operating via umbrella companies, so in this sense, there are no direct implications. There is nothing that you, as an umbrella employee, need to do.

The IR35 legislation is only a consideration for those working through personal service companies (PSCs), not those engaged under a contract of employment, such as umbrella workers.

Will recruitment agencies be impacted?

Yes. When acting as the fee-paying party in the working arrangement and – assuming that all legal obligations were met in the supply chain – under IR35 reform, recruitment agencies are liable for non-compliance.

The IR35 reform repeal means that from 6th April 2023, recruitment agencies will no longer be liable for IR35.

What does the repeal mean for contractors?

As mentioned above, contractors will become responsible again for determining IR35 status and liable in the event of non-compliance.

Can contractors prepare for the IR35 reform repeal?

The changes will not take effect until 6th April 2023 (meaning nothing will change until then).

However, in the lead-up to the repeal, contractors are encouraged to explore options to ensure that they are operating under the correct IR35 status and protected from the risks posed by the legislation.

In October, the government is expected to publish further guidance to help contractors and businesses impacted by IR35 compliantly manage this latest change to the legislation.

Parasol will, of course, update you when this is available. If you have any questions or would like to discuss your umbrella requirements with one of our experts, please request a callback and a member of the team will be in touch.