The contractor community could hardly contain their joy last Friday when Chancellor Kwasi Kwarteng said: “We can also simplify the IR35 rules – and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses… we will repeal the 2017 and 2021 reforms.”
Kwarteng was referring to the off-payroll working rules (ITEPA 2003, Pt 2, chp 10), which came into effect on 6 April 2017 for public-sector contracts and from 6 April 2021 for large businesses in the private sector. Off-payroll working changes who is responsible for deciding if the worker should be treated as an employee for tax purposes; it does not change the underlying IR35 rules (ITEPA 2003, Pt 2, chp 8).
Wrong Impression
The Chancellor’s announcement does not mean that the IR35 rules in ITEPA 2003, Pt 2, chp 8 will be repealed, although many contractors may have got that impression from this statement in para 3.44 of The Growth Plan 2022: “The 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) will be repealed from 6 April 2023.”
It is always important to read to the end of the paragraph, which continued as: “From this date, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.”
It appears clear from this statement that IR35 will continue to exist from 6 April 2023 onwards, although the legislation will have to be revised slightly to remove reference to the off-payroll rules. It is possible that there could be a U-turn on this point, as anything is possible in politics right now.
Reality of Continued Enquiries
HMRC will still be conducting enquiries into personal service companies and their engagers, both under the off-payroll rules (for periods from 2017 to 2023) and under the IR35 rules for periods before 6 April 2021 and after 5 April 2023.
At the centre of both of these interlinked regimes is the complex area of the employment status of the individual worker. This is has been discussed and challenged in many cases such as those involving: Adrian Chiles, Kaye Adams and Paul Hawksbee as well as the Premier League Referees case (PGMOL), which is heading to the Supreme Court next year.
The CIOT president Susan Ball commented: “Consultation is needed not only on the future of IR35, but also on how the employment status of a worker is established for tax purposes and what the differences should be in the taxes paid of the different status. Without a thorough review of this area, we risk a return to the ‘bad old days’ when non-compliance was rife.”
Status Determinations
We are not quite back to the IR35 position before off-payroll working was introduced, as over the past 18 months (for private sector) to five years (for public-sector contracts), engagers have been issuing numerous status determination statements (SDS).
The SDS records the decision that the worker is either caught by the IR35 rules (should be taxed as an employee) or is not. Certain large businesses have made blanket decisions for whole classes of workers, and in many circumstances those workers did not feel confident in challenging the SDS.
However, where an SDS exists that states the contractor is caught by IR35, it is going to be difficult for the parties to the contract to reverse that conclusion on 6 April 2023.
Pressure on agency workers
The Low Incomes Tax Reform Group (LITRG) is worried that the removal of the off-payroll working rules will mean that low-paid agency workers will be forced to work through limited companies by agencies or umbrella companies, as was the norm before off-payroll came into effect. This used to save some money within a supply chain but it created significant problems for workers.
Meredith McCammond, LITRG technical officer commented: “The off-payroll rules weren’t perfect, but they did remove this incentive.”
McCammond added: “Those at the lower-income end of the pay spectrum who find themselves working through limited companies usually have very little understanding of how such legal entities operate. They often cannot separate out their own affairs from those of the company, and stand very little chance of handling their tax affairs correctly, let alone dealing with the Companies House requirements. This can lead to messy and expensive compliance issues that can follow the worker around for years.”
LITRG warns that unless HMRC has the resources to enforce anti-avoidance legislation around limited companies properly, the days of disregard for the rules – fuelling the use of agency worker limited companies to increase profit and reduce obligations within a supply chain – look set to return.
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