IR35 reforms repeal: How it stands to benefit the tech sector’s SMEs and contractors

In the lead-up to chancellor Kwasi Kwarteng’s first fiscal statement, or mini-budget, on Friday 23 September, I had three main requests for prime minister Liz Truss’s new government when it came to the IT sector. These were:

1. Address the ambiguity for how suppliers are assessed against the IR35 tax avoidance rules.
2. End the reliance on consulting firms for the public sector’s own digital transformation ambitions.
3. Clarify the public sector’s position on working with SME suppliers.

Leaving aside the volatile market reaction to the contents of the mini-budget, the following is my assessment of how the fiscal statement addresses my three requests for this new government, and its broader impact on the health of our sector at large. Truss said she was “going for growth”,  but how will this budget deliver growth to the UK tech sector?

The most notable of all of Kwarteng’s announcements was his pledge to scrap the 2017 and 2021 IR35 reforms. He didn’t just hint at addressing the ambiguity of how suppliers are assessed for IR35 or promise to “review IR35” – he simply declared that the off-payroll working rules will be repealed from 6 April 2023.

This was the announcement we were hoping for, but I have to say I wasn’t expecting anything as definitive as this. Like many others, we have been warning about the disastrous impact of IR35 on the UK’s technology leadership, with the most recent reforms of 2017 and 2021 effectively forcing SMEs out of existing, viable projects and driving up the overall cost of transformation projects for everyone.

The “sledgehammer-to-crack-a-nut” approach of IR35 resulted in many organisations simply closing their doors to SMEs altogether. For a moment in April 2022, our consultancy was one of these SMEs after our longest-standing client (a very well-known government agency) suddenly instigated a blanket ban on SMEs due to its fear of IR35 enforcement action by HM Revenue & Customs.

This was despite us (and many of our peers) already being engaged in extensive, mission-critical and multi-year digital transformation projects and having proven our outside-IR35 status on multiple occasions.

While we were lucky enough to receive a reprieve on this extension (after extensive negotiations and the direct support of our customer), other SMEs have not been so lucky. Some projects were simply closed down because there was no one left to continue them, resulting in years of investment going down the drain.

The announcement to scrap the 2017 and 2021 reforms is a big win for the public sector, private sector, and the many thousands of contractors who work for them, so I welcome their abolition. It has also helped to clarify the government’s position on SMEs in its supply chain – where the government’s statements in support of SMEs have often clashed with reality on the ground.

We previously called on the public sector to reduce its reliance on large consulting firms for its digital transformation projects. Despite many declarations that it wants to engage with SMEs in this area, the truth is that the public sector still relies on the same large consultants it always has done, who roll out the same flawed strategies that fail to meaningfully transform the public sector and only serve to make it more reliant on outside help.

While the budget wasn’t necessarily the right place to address this, the IR35 reforms will go a long way to rectifying this situation.

Romy Hughes is a director of change management consultancy Brightman.