IR35 – The end of IR35 reforms
Reforms were made to the IR35 regulations in both 2017 (for the public sector) and in 2021 (for the private sector). The intention behind the reforms was to combat tax avoidance by individuals (and the end users who hire them), who work via their own personal service companies (PSC), where they would be considered to be an employee if their PSC was not used. Where these individuals are caught by IR35, they are classed as deemed or disguised employees by HMRC, with the result that income tax and National Insurance contributions (NICs) must be deducted as if the individuals were employed. The reforms placed this responsibility to deduct tax onto the fee payer (often the end user) along with obligations on the end user to determine the tax status of the individuals they contracted with via a PSC.
The repeal of these reforms from April 2023 means that end users engaging contractors via their PSC will no longer be required to carry out employment status assessments and the PSC will once again be responsible for determining whether the IR35 rules apply and, if they do, making the correct deductions for tax and NICs.
A welcome reform?
This change will no doubt be welcomed by many businesses who use and supply contract workers. Many organisations struggled to contend with the reforms, which have imposed significant compliance burdens, and in many cases have been incredibly costly and time-consuming to implement. Numerous end users have subsequently turned to operate alternative engagement models – with some imposing a blanket-ban on engaging with personal service companies (PSCs) and others substantially reducing their use of that workforce supply model and engaging with so called “umbrella companies”, by way of example.
There is also no doubt that reversing the reforms will also be a benefit for contractors. When the reforms originally came into play, many individuals either begrudgingly became employees, changed their line of work, or moved overseas due to the complexity and ramifications involved in continuing to operate through a PSC. Once the reforms are repealed, contractors will be in a better position to determine their own employment status, having a more accurate view of the way they work and will be able to deal with HMRC directly if a dispute arises. It will also provide the opportunity to increase their take-home pay when supplying their services – although they will need to ensure their PSCs are fully compliant.
What does this mean for the end user?
End users must continue to comply with their current obligations under the IR35 regime until 6 April 2023 – including conducting employment status determinations and ensuring they are passed down the supply chain and (where they are the fee payer) deduction of the correct amount of tax and NICs.
Whilst the onus will no longer be on the end user from April 2023, organisations should not take this as an opportunity to encourage workers to engage through PSCs without the appropriate checks and balances, as if the arrangements are deemed to be artificial they may be caught by other legislation and powers at HMRC’s disposal. For instance, end users will still be obligated to comply with the Criminal Finances Act 2017, where they are required to take reasonable steps to prevent the facilitation of tax evasion in their supply chains. If they fail to do so and there is tax evasion in their supply chain, they face prosecution for a corporate criminal offence – where the penalty is an unlimited fine.
The road ahead
Many end users have changed the way they operate due to the IR35 reforms and it will be interesting to see whether, from April 2023, businesses reverse their approach, for instance to having blanket-bans or engaging with umbrella companies. Will it all be too much of a hassle to undo the policies they have spent significant time and money implementing? We may need to wait until the government publishes the specifics of the repeal to see how things pan out.
It is important to note that the repeals announced by the Chancellor of the Exchequer relate to the reforms to the IR35 regulations which were made in 2017 and 2021 - not the entire IR35 regime. This means that, with effect from 6 April 2023, the regime that existed prior to those reforms will once again apply to all relevant engagements (Chapter 8 of the Income Tax (Earnings and Pensions) Act (ITEPA)) and this in turn will mean that it will be the responsibility of the individual and their personal service company (not the end user) to determine their workplace tax status and to deal with the resulting tax consequences.
It will also be interesting to see how this announcement will impact HMRC’s approach to employment status compliance and enforcing the regime – both between now and April when the repeal comes into play. Before the 2017 and 2021 reforms were enforced, it became incredibly burdensome for HMRC to pursue any potential breaches of the IR35 regime against every single contractor whose self-determined workplace status it did not agree with. Often the value of tax recovered would be considerably less than the cost for HMRC to undertake the legal proceedings.
Our overall message to clients is to not rush to any changes – as the law will not be repealed until April 2023 and there will no doubt be further guidance published by HMRC in terms of its expectations and to help businesses prepare for the position after 2023. That said, unlike the recent reversal by the government’s proposed scrapping of the 45 percent rate for those earning more than £150,000, these changes seem likely to be implemented, something that is eagerly awaited by many of our clients. Please do get in touch if you would like any advice relating to this.
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