The pace at which the government executed its hand-brake turn, slamming its mini-budget into reverse, is enough to unnerve most. 

If anything has become apparent over the last few weeks, it must be this:

1. Just because you’re sitting in the driver’s seat of a formula one car, doesn’t make you Lewis Hamilton;
2. A swift gear-change won’t alter the trajectory of a race; and
3. Sticking doggedly to a route plotted by an out of date Sat Nav runs the significant risk of driving blindly over the edge of a cliff.

So far, so familiar…

The political posturing and naïve bravado has been replaced by an unprecedented reversal of economic policy. Practically everything, other than cuts to stamp duty and national insurance, and the cap on bankers’ bonuses, have been scrapped as the (new) Chancellor attempts to stabilise the markets by pretending nothing ever happened, and it was all just a terrible dream….

Whilst it is evident that something had to be done, in a desperate attempt to reinstate the status quo, has the Chancellor thrown out the baby with the bathwater?

In my capacity as an employment law specialist, there was at least one change introduced on 23rd September that was welcomed by many of my employer clients: - the repeal of the off pay-roll working rules.  

Many will recall that the off-payroll working rules were introduced in April 2021, as a re-branding of IR35.  

What is IR35? 

“IR35” refers to anti tax-avoidance legislation. It was originally introduced in 2000 and applies where an individual (the “worker”) provides services, personally, to another person (the “client” through an intermediary, such as a “personal service company” (“PSC”). The presence of a PSC avoided any direct contractual relationship between the worker and the client company, and the absence of a direct contractual relationship meant that there could be no employment relationship between the parties. 

This meant that both parties could benefit from the more favourable, self-employed tax regime. 

The IR35 provisions were introduced to close this loophole. They required the worker’s PSC to assess the worker’s employment status (by reference to various tests used to determine employment status), and if but for the presence of the PSC the worker would look like any other employee of the engager, the PSC would be responsible for deducting any tax/NICs due under PAYE, as necessary. 

From 6 April 2021, however, where the end-user client (i.e. the organisation who engaged the worker’s services through the PSC) was a medium or large organisation, the responsibility for determining whether the IR35 rules (also known as the “off-payroll rules”) applied fell to that end-user client and not to the PSC. The end-user client would then be responsible for making appropriate income tax and NIC deductions under PAYE.

The rules are notoriously complex, and the outcome of the status determinations is very uncertain. As often happens when things are uncertain, people stick to what they know. This led to many organisations either completely culling their cohort of self-employed consultants or operating PAYE on all fees as a matter of course, for fear of ending up, inadvertently, on the wrong side of a tax tribunal or HMRC decision.  

IR345 will remain (for now)

The announcement yesterday by the new Chancellor that the off-payroll working rules will now remain, rather than be repealed in April 2023, is going to be disappointing for many individuals and organisations who welcome the freedom of choice and flexibility that the contractor/consultant relationship affords.  

My view, however, is that we should not lose heart. The purpose of the Chancellor’s dramatic U-turn is to stabilise the markets as quickly as possible. To revert to my original analogy for a moment, if a car is hurtling towards a cliff edge, the sensible thing to do is to hit the brakes - not to waste time pondering whether the car will run out of fuel before it gets there!  

By the same token, there is no time for a forensic analysis of the mini-budget in order to determine what is, or is not, worth keeping. After all, the longer we take to act, the greater the risk of irreversible damage. 

Even so, once the dust has settled, I suspect that this is an analysis that will take place at some point in the near future. Rather than throwing out the baby with the bathwater, the government may be simply reverting to baby steps instead. Accordingly, I imagine this is unlikely to be the last word we will hear on IR35 reform.