IR35 Off Payroll Reversal – Will Chancellor Kwasi Kwarteng Backtrack?

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Contractors IR35 Question
Contractors IR35 Question

1. What Changes has Kwasi Karteng Made to his Mini Budget?

Chancellor Kwasi Kwarteng has bowed to pressure from Conservative MPs and he has reversed his decision to abolish the 45% tax rate.

It seems that this was a joint decision with Prime Minister Liz Truss.

Several MPs had said that they won’t support it.

Although the changes in the mini budget have been portrayed as a fait accompli and that is far from the truth.

They form part of the Finance Bill and that has to get through Parliament.

It was looking increasingly likely that many Conservative MPs, including senior ones like Michael Gove would not support the Finance Bill in its present condition.

2. Why did Conservative MPs Revolt Against the Mini Budget?

The big bugbear was the abolition of the 45% tax rate which only applies to people earning more than £150,000.

Those ‘tax cuts for the rich’ come at a time when many people are struggling and inflation is rampant cutting the value of the money in their pockets.

There is a cost of living crisis and it is not good politics to be seen to be handing out cash to the rich when people are having to choose between heating and eating.

On top of that polls were now showing a Labour lead of 19%, 21% and shockingly for backbench MPs, 33%. The last one would leave only 61 Tory MPs if this was replicated in a general election.

So, Chancellor, Kwasi Kwarteng, and Prime Minister Liz Truss have decided to leave the 45% tax rate in place.

It seems that they don’t make that much money from it anyway.

3. What Will the Government Do About the Reversal of the IR35 Off Payroll Rules?

However, UK IT Contractors are now wondering if this is the end of the changes to the mini budget that Conservative MPs will be happy with.

The abolition of IR35 and Off Payroll working never had a hell of a lot of support in the Commons.

Will this be seen as a tax cut for the quite well off?

Now that Conservative MPs have had the taste for getting the Government proposal on the 45% proposal stopped will they want more of the mini Budget dumped?

4. What are the Off Payroll Rules?

Just in case you don’t know, the Chancellor announced that he was abolishing the IR35 off payroll rules put in place in the public sector in 2017 and in the private sector in 2021.

Those IR35 off payroll rules had a devastating effect both on UK IT Contractors and on the companies who make use of them, i.e. almost all decent sized UK companies.

UK IT Contractors had always decided their own IR35 tax status themselves. If they got it wrong they could get investigated by HMRC and heavily fined and forced to pay back tax.

It ruined many a contractor.

However, there was safety in numbers and UK IT Contractors were more likely to be hit by lightning than face an IR35 investigation.

5. When and Why Did the Government Bring in the Off Payroll Rules?

In 2017 the Government changed all this in the public sector which they largely controlled.

Public sector companies would now be responsible for deciding their contractors’ IR35 status.

Despite the problems that this threw up, poll tax style, they decided to implement it anyhow in the private sector in 2021.

Although the Government and HMRC couldn’t see this, it was a disaster.

6. How Did Major UK Companies React to the New Off Payroll Rules?

As well as deciding all their contractors’ IR35 tax statuses, companies would also be fined and would have to pay the back tax if they got it wrong.

Many major companies who traditionally took on contractors did not want to take the financial risk.

So, many of them put a blanket ban on the hiring of contractors.

So, many contractors had to go permanent or be employed by their agencies. The UK IT Contractor profession shrunk.

7. What Effect did the IR35 Off Payroll Rules Have on UK Companies?

It also had a major effect on virtually all of the UK’s major companies.

The UK’s major companies have long experience of using contractors. They know, from experience, the optimal percentage of contractors that they need to use and the optimal percentage of permanent staff they need.

Traditionally, companies used contractors when they had a short term uptick in the number of IT workers, permanent or contract, that they needed to use.

For example, during a major project, many companies will hire a lot of short term contractors who they won’t need when the project is completed and implemented.

When the project is completed the company can get rid of those contractors easily enough without paying redundancy money or maybe even without notice.

8. What Would a Blanket Ban on UK IT Contractors Mean to UK Companies?

However, having a blanket ban on the use of UK IT Contractors meant they would have to employ more permanent IT workers for the duration of the project and then couldn’t easily get rid of them when the project was finished. Either that or they would employ fewer permanent staff and just make the project go more slowly.

However, they stood the chance of falling behind their competitors if they could not get the software component of new products ready before their rivals.

It was basically the Government, backed by HNRC, interfering in the ways that companies best operate. The working practices forced on those companies meant they were less efficient.

9. How Did UK Companies Lose Out from the IR35 Off Payroll Rules?

What the Government and HMRC didn’t realise was that if companies are not working to their optimal efficiency they are not so competitive with their foreign rivals who are not constrained by IR35 and the off payroll rules.

They will make less profit and so pay less tax.

However, the loss to the Treasury coffers by forcing UK companies to work less efficiently isn’t so easily calculable as how much tax they could grab from UK IT Contractors.

No Prime Minister, Chancellor or Government going back at least to 1999 when IR35 was first mooted has been contractor friendly – until Chancellor Kwasi Kwertang and Liz Truss came along.

Clearly major UK IT companies as well as contractors and contractors groups had been busy behind the scenes.

10. What Are the main Dangers Over the Off Payroll Rules Reversal for UK IT Contractors?

But the show’s not over till the Finance Bill, with the off payroll rules reversal, gets through Parliament. That is far from a given the way Conservative MPs are panicking.

However, if the Finance Bill does go through Parliament, there will be dancing in the streets of merry old England – and the contractor profession will have been saved.

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