Repealing Chapter 10 – what can we expect from IR35 in 2023?

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Update: This policy area has been subject to frequent change in recent weeks - as a result, the information in this article is out of date. For the latest on IR35, visit our IR35 hub.

By now, you’ve probably heard the news – the much-maligned IR35 reforms are to be scrapped in April. This is undoubtedly positive news for genuinely self-employed contractors who have endured an impenetrable web of blanket determinations, contractor bans and ‘umbrella only’ contracts. But whilst the rules may be going back to the way they were pre-2017, contractors should be wary of the lasting ripple effect these reforms will leave behind.

What did the Chancellor announce?

Delivering the government’s ‘Growth Plan’ to Parliament, Chancellor Kwasi Kwarteng announced that the 2017 and 2021 reforms to IR35 will be repealed, saying they caused “unnecessary complexity and cost for many businesses.”

What are the 2017 and 2021 reforms?

The reforms – officially known as Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, Part 1 – stipulates that when a worker’s services are provided through an intermediary (typically a limited company), the end client is liable for ensuring that the correct income tax and national insurance deductions are taken from the worker’s earnings at source, rather than paying a gross fee to the intermediary.

When engaging a contractor operating via an intermediary, end clients are required to determine whether it is a business-to-business engagement, or instead one of “deemed employment” (often referred to as being ‘inside IR35’) – meaning Chapter 10 applies.

The reforms applied to public authorities from April 2017 and to medium and large businesses in the private sector from April 2021.

Read our full guide on IR35.

The full Growth Plan states that the reforms will be repealed from 6 April 2023 – from this date, contractors with limited companies will become responsible for the IR35 status of their engagements. Whilst we await the full details of how these reforms will be unpicked in practice, our current understanding is that the entirety of Chapter 10, Part 1 of ITEPA 2003, will be repealed.

However, the IR35 rules themselves –  Chapter 8 of ITEPA – will remain in place, and HMRC will, in the words of the Chancellor, “continue to keep compliance closely under review.”

Clients will return to engaging contractors, but not all at once

In IPSE’s survey of medium and large-sized clients earlier this year, 76% said that contractors are a valuable resource to their business – yet 47% said IR35 compliance had become an administrative burden, whilst 35% said it made it more difficult to attract the freelance talent they need.

With responsibility (and liability) for assessing IR35 status moving away from clients and back to contractors, we anticipate that many will return to engaging freelancers again – particularly the 49% of clients who told us they could not achieve the same results in their business without them.

However, whilst the rules will change overnight on 6 April 2023, we shouldn’t expect the practices of every engager to change at the same pace. Of course, some may change overnight, and many continued to engage contractors on an outside IR35 basis even after Chapter 10 was introduced.

But for those that judged the non-compliance risks of outside IR35 engagements to be too high, it’s quite possible that Chapter 10’s real consequence – to turn freelancers from an asset into a perceived liability – could linger for some time.

For many clients, the reforms necessitated over-compliance in the form of blanket determinations, and outright abnegation in the form of contractor hiring bans, which they may feel the need to continue all the way until close of play on 5 April 2023. The chilling effect of the draconian Chapter 10 rules, having placed clients in a state of perpetual IR35 vigilance, means some may be slow recognise that they can once again utilise freelancers without falling foul of some other obscure and opaque legislation.

Uncertainty around pre-repeal ‘inside’ determinations

Similarly, there is some uncertainty around the treatment of contracts that are deemed inside IR35 by a client before 6 April 2023, that run beyond that date.

Let’s suppose a client engages a contractor for a six-month contract beginning in February 2023 and makes an inside IR35 determination – how should earnings generated from 6 April onward be treated for tax? Does the client’s determination stay, or does it fall away? If the contractor believes the engagement is in fact a contract for services, can they treat post-repeal earnings as being outside IR35? And how might HMRC view this?

There is unlikely to be a one size fits all approach to this grey area; it will depend on what individual contractors negotiate with their clients. But it is worth remembering that even if a client determines an engagement to be inside IR35, this does not make it an indisputable legal truth that persists after Chapter 10 is repealed – IR35 status is rooted in case law, not in a client’s determination. This is therefore a question of HMRC’s approach to enforcing IR35 rules.

This is a situation which thousands of contractors could encounter; IPSE is preparing resources and guidance to support members that do. And, on Thursday 6 October, IPSE’s Policy Director Andy Chamberlain will host a morning member briefing to discuss these questions and other considerations for contractors as we approach April. Register here to watch live, or receive a recording if you want to watch later.

With great responsibility comes great liability

The end of Chapter 10 is a positive step for contracting – it will remove one of the biggest hurdles to free enterprise between freelance businesses and their clients, who will no longer be incentivised to place freelancers in quasi-employment.

But the liability for IR35 hasn’t disappeared – it will once again rest with contractors who, for all the difficulties presented by being required to work inside IR35, were at least shielded from the threat of a large tax bill.

Beyond arming themselves with knowledge of the IR35 rules and employment status, contractors can protect themselves by getting their contracts reviewed by experts and acquiring tax representation insurance in the event of an HMRC inquiry. If you are an IPSE Standard or Plus member, you can already access these services – see our Membership Benefits page for a reminder of what your membership entitles you to.

To keep up to date with all things IR35, please keep an eye on our IR35 latest news page or sign up for our newsletter.

Meet the author

Fred Hicks

Senior Policy and Communications Adviser