During her Conservative party leadership campaign, Liz Truss repeatedly pledged to cut taxes, enable a small business revolution and reduce red tape for all businesses, including reviewing IR35. This morning's announcement that the IR35 reforms will be repealed from 6 April 2023 sees this pledge being put into action.

IR35 is a tax anti-avoidance rule designed to combat "disguised employment" in situations where an individual contractor is providing their personal services (i.e. their labour) to an end-user via their own intermediary, such as a personal services company or partnership ("PSC").

IR35 applies when the contractor would be an employee (or officeholder) for tax purposes if they were hired directly by the end-user. If IR35 applies, PAYE and NICs must be operated in respect of the fees paid to the PSC.

Under the original IR35 rules, the contractor was responsible for assessing whether IR35 applied and, if so, operating PAYE/NICs. The rules were changed for the public sector from April 2017 and for large and medium-sized private sector businesses from April 2021. Under those changes, responsibility for assessing whether IR35 applies moved from the contractor to the end-user. Now if the end-user determines that IR35 applies, responsibility for operating PAYE and NICs sits with the "fee payer" (generally the entity which contracts directly with and pays the PSC) rather than the PSC to.

This is, however, now set to be reversed. In a measure billed as "freeing up time and money for businesses that engage contractors", Kwasi Kwarteng has confirmed that with effect from 6 April 2023, irrespective of whether the contractor is working in the private or public sector, the contractor will once again be responsible for determining their own employment status and paying the appropriate amount of tax and NICs under IR35.

Although businesses spent a great deal of time and money preparing for the IR35 changes, most are likely to welcome this reversal as it will give them more flexibility over staffing and potentially reduce business costs. These are important considerations in the current tight labour market and economic climate. However, a key reason why the responsibility for determining status and operating PAYE and NICs was moved from the contractor/their PSC to the end user/fee payer was to ensure compliance with the IR35 rules. Mr Kwarteng indicated that he believed this measure would "minimise the risk that genuinely self employed workers will not be caught by IR35" but it is far more likely to mean contractors who are disguised employees will not be paying the right amount of tax.

For information on the other budget changes, please read Matthew Rowbotham's article here.

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