Predictions that firms are now mulling moves to make recently hired staff redundant after initiative scrapped by chancellor

Construction firms which have been forced to shell out on getting compliant with the IR35 tax reforms should be calling for the government not to apply the rules retrospectively after they are scrapped, tax experts have said.

It comes as some predicted that firms which have put suppliers onto PAYE because of the changes will now make them redundant after the chancellor caught the industry off guard and ditched the initiative a little over a year after it came into force.

Former Treasury advisor Crawford Temple said the construction sector has a case for telling ministers to abandon chasing backdated liabilities for the off-payroll rules once they are abolished on 6 April next year.

Last week, new chancellor Kwasi Kwarteng announced that the controversial IR35 reforms, which put the responsibility of assessing the tax status for self-employed workers onto the employer, would be repealed just 15 months after they came into force in the private sector.

Kwarteng Sept 1

Kwasi Kwarteng announcing the repeal of IR35 rules on Friday

Treasury documents said the decision, which is part of a series of measures intended to boost economic growth, would “free up time and money for businesses that engage contractors, that could be put towards other priorities.”

It means that firms which have spent large amounts on ensuring compliance with the new rules, which in some cases has included putting formerly self-employed workers on payroll, will find themselves out of pocket.

While Temple said there was “zero chance” of the government offering compensation for the sums invested, he said: “What you could call for is for the government to confirm that it won’t be enforcing or testing [IR35 rules] so everyone can look back and wipe that potential liability or risk off their sheets.

“What I would be calling for as a sector is to say if [the government] now recognise that the IR35 rules were not right, let’s not retrospectively enforce them for the period that they applied, let’s just all move on.”

Temple, who is the chief executive of tax compliance consultant Professional Passport and previously sat on the Office of Tax Simplification, a committee which advises the government on the UK tax system, said it had cost firms a “massive” amount of money to implement processes to ensure IR35 compliance.

Dave Chaplin, chief executive of tax compliance firm IR35 Shield, added that it would be “misguided” for HMRC to try and retrospectively enforce the rules after 6 April as long as there is evidence that firms have acted in good faith and with reasonable care.

IR35 was first introduced in 2000 but widespread non-compliance prompted ministers to introduce a series of reforms toughening the rules for the public sector in 2017 and then the private sector in 2021.

Chaplin estimated the amount that large construction contractors will have paid to get ready for the rollout of the reforms would have been “easily six figures” and then around half of that each year since. He said there would be “massive anger” in the industry about the decision to repeal the rules.

“The rules were in for 15 months and then scrapped - it’s just ridiculous for firms. That’s not tax certainty. Firms need tax certainty and consistency, so you should be doing things slowly so firms have time to react,” he said.

The more risk averse companies which put formerly self-employed suppliers on payroll will now be weighing up options which include making the newly hired staff redundant.

“Reintroducing the kind of flexibility back into the business that construction firms have been used to for years, that’s going to take time and it is not a simple transition to go back from the new rules to the old rules,” Chaplin said. “There are all sorts of hurdles that firms will have to overcome.”

He added that Kwarteng’s decision to repeal the primary legislation which underpins IR35, without a consultation, was “unprecedented” and could cause overseas investors concern about certainty of taxation in the UK.

“The fact that things can just change direction at any point without even consultations makes us look like mavericks. That kind of sweeping change is just unheard of,” Chaplin said.

The repeal of the IR35 reforms will need to go through parliament in a Finance Bill which is expected to be brought forward in November and receive Royal Assent in February or March next year.

Conservative MPs have been reportedly plotting a rebellion against the bill if the pound reaches parity with the US dollar. Sterling fell to a 50-year low of $1.03 yesterday morning following the chancellor’s mini-budget on Friday.