IR35 Reversal Proposals Dropped

New Chancellor Jeremy Hunt has announced that plans to reverse IR35 legislation have been dropped. This reversal comes less than a month after his predecessor, Kwasi Kwarteng, proposed the changes.

IR35 legislation was meant to ensure that off-payroll contractors paid the appropriate amount of tax. While IR35 was unpopular, its reversal, originally planned for 8th April 2023, will no longer go ahead.

Mini-budget U-turn

26th September’s mini-budget caught the headlines when announced by former Chancellor Kwasi Kwarteng and included cuts to income tax for high-earners and stopping a rise in corporation tax. Its reception was almost universally negative, leading to turmoil in the financial markets and a drop in the pound’s value.

The new Chancellor, Jeremy Hunt, has announced the reversal of many of the mini-budget’s more controversial parts and seen the IR35 reversal proposals dropped.

What is IR35?

IR35 was drafted in 2000, implemented in the public sector in 2017, and finally rolling out to the private sector in 2021, after the Coronavirus pandemic delayed it for a year.

The legislation targeted ‘off-payroll workers’ and contractors operating out of ‘personal limited companies’ for a single client. Therefore, they could potentially find themselves paying less tax than if they operated as a sole trader.

IR35 was controversial, with the mini-budget’s mastermind saying the following:

“In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses. So, as promised by My RHF the Prime Minister, we will repeal the 2017 and 2021 reforms.”

Former Chancellor Kwasi Kwarteng.

The government intended to drop the legislation by 8th April 2023, with the hope that its removal would simplify the tax system and make the United Kingdom a more competitive economy. However, its reversal has now been dropped, and IR35 looks set to remain in place until further notice.

‘Personal limited company’ liquidation

With IR35 remaining in place, contractors and off-payroll workers operating out of ‘personal limited companies’ may no longer have a tax advantage over operating as a sole trader.

If that sounds like your situation, you may wish to liquidate your personal limited company. The way in which you choose to do so depends on that company’s solvent position.

• Solvent company liquidation
  Your company is solvent if it can pay its liabilities to creditors as and when they fall due. Directors of solvent limited companies can liquidate that company via a Members Voluntary Liquidation (MVL) if the company has served its purpose and has no reason to continue trading. It can also allow directors to claim Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if the company has sufficient cash at the bank.
  Closing a personal limited company through a tax-efficient MVL
• Insolvent company liquidation
  Sometimes, companies might not be able to repay their liabilities as and when they fall due, be that down to a period of low takings or a sudden, unforeseen debt. Whatever the cause, an insolvent limited company’s closure process is different to that of their solvent counterparts and is called a Creditors Voluntary Liquidation (CVL). Entering a CVL closes the company in an orderly manner and draws a line under the debts, allowing the directors to move on and start afresh.
  More on Creditors Voluntary Liquidation
  

In summary

While the proposed reversal of IR35 is less than a month old at the time of writing, a change in Chancellor has already seen those changes scrapped. The legislation was introduced so contractors and ‘off-payroll workers’ operating out of personal limited companies don’t pay less tax than they would if they were sole traders. The reversal was meant to go ahead on 8th April 2023, but current Chancellor Jeremy Hunt’s changes seemingly mean the legislation is here to stay.