Impact of Changes to IR35 Regime

Julie Sabba, MLP’s Employment associate, analyses the likely effect of the recent changes to IR35, announced by Kwasi Kwarteng, in his recent mini-budget.

What is IR35?

In brief, the IR35 regime applies where an individual personally performs services to an end user, under arrangements involving a third party (usually a limited company), rather than having a direct contractual relationship, for instance through a contract of employment or service agreement.

Where this is done, the individual is not regarded as an employee or an office-holder of the end user for income tax or National Insurance contribution purposes. The employee status of the individual is therefore directly relevant to the tax provisions that should apply to the arrangement.

What is the key change that has been announced?

The repeal of recent changes, signalled by the Government in their recent mini-budget, has shifted the responsibility of determining if a particular arrangement falls within IR35, from the end user (ie the business engaging the individual) back to the individual, which re-establishes the original position before changes implemented in April 2021. By extension, this means that the risk of any financial penalty by HMRC will also fall on the individual, rather than the end user business.

What does this mean for IR35 going forward?

Essentially, this is likely to result in an increase in such arrangements as the risk to business, from wrongly assuming IR35 applies, has been removed. Of course, advice should always be sought in respect of specific circumstances but it is certainly thought that the legislative change was designed to encourage business growth, free from the constraints of regulation; passing more of the risk to individuals with shallower pockets, who are less likely to be pursued by HMRC.

If you would like advice from the Employment team at MLP Law in respect of any of the issues raised here or more generally, please do not hesitate to get in touch on 0161 926 9969 or employment@mlplaw.co.uk, or follow us on Twitter @HRHeroUK.