What does the repeal of the IR35 (Off Payroll Rules) really mean?
As I am sure you are all now aware the IR35 reforms that were introduced for the Public Sector in 2017 and the Private Sector in 2021 were repealed last week, with the change coming into effect in April 2023.
On the face of it this appears to be very good news for the UK contracting community, with the opportunity to revert to more tax-efficient supply via personal service company (PSC) arrangements.
So what has really happened here? Under the reforms from 2017/2021 the responsibility for assessing the tax status of a worker passed to the public and private sector users and suppliers, therefore passing all liability to end users and suppliers if the worker is found to be really not selfemployed. This has resulted in many end users effectively banning the use of PSCs and forcing contractors into employed models. The repeal will pass the decision making, and liability, for this status back to the personal service company, allowing for more tax efficient engagement where appropriate.
As ever with tax law the transition back to what was in place beforehand will not be straightforward in all cases, here we discuss what we anticipate to be some of the commonly asked questions.
1. Will it be easy for a contractor to switch from an inside IR35 arrangement to an outside one after April 2023?
• It is likely that the end user determinations issued in the period up to April 2023 may have a hangover effect after the legislation is repealed. HMRC will effectively have an easier job taking action against contractors because there will be a decision on record (via an SDS) that the role is not really self-employed. It may be difficult for contractors to mount a defence if investigated by HMRC, which in turn will create worry in the contracting population of the potential liability that overhangs this.
2. Will the end user, who has for the last two years determined a role as inside IR35, be able to turn a blind eye to PSC judgments placing the same role outside IR35?
• All organisations have an obligation to take reasonable steps to prevent the facilitation of tax evasion in their supply chain. If they do not, and there is found to be tax evasion in the supply chain, they can face prosecution for a corporate criminal offence. And so will end users seek to reassure themselves as to the ongoing tax status of contractors past April 2023 to ensure they are not failing to prevent tax evasion? Inevitably corporate organisations will be nervous about this for some time.
3. Will corporates continue with their blanket umbrella only policies?
• Many end users have in effect banned the use of PSCs, and may decide to uphold this policy simply because of the hassle involved in undoing that policy and potentially opening up other liabilities. This will certainly reduce their access to talent, with the repeal will likely follow an appetite to work on outside IR35 engagements for a large proportion of the contractor population (particularly in high demand areas such as secure government) and as such we would expect migration away from blanket policies over time, if not immediately.
4. What else could HMRC do to tackle a migration to outside working?
• The hope in the repeal of this legislation is that there is a clear intent from government to allow those workers that claim to be self-employed to be left alone. The likelihood is that HMRC will focus back on evidencing supervision, direction and control as their key measure for establishing in self-employment is present. As such it is critical that all contractors continue to be vigilant in showing clearly that there is no supervision, direction and control of the worker.
5. What will contractors who have now closed their limited companies need to do?
• If the limited company has been closed within the last two years it falls within HMRC’s targeted anti avoidance rule (TAAR), which in essence stipulates that if you open a new company with the same trade within two years of taking the final funds out of your limited company , you may have to revisit any tax benefits you received when closing the company. In essence this means that any funds withdrawn as capital will then need to be treated as income, which of course could mean there is additional tax to pay.
6. What will happen to the CEST tool?
• It will continue to exist, and we expect HMRC will continue to promote its use, however the responsibility for making the determination drops down to the PSC level and therefore there will be no ongoing requirement for end users to run a status determination of any kind.
7. Does this repeal spell the end of Statement of Work (SOW) models?
• Not at all. The key to the migration to SOW models has been the provision of services to outcomes rather than to time. There is great merit in shifting some working arrangements to have a great emphasis on the provision of outcomes and deliverables rather than time alone. This model can be both easier to purchase and easier to deliver, and as such we fully expect the continuation of SOW models as and where the method continues to have merit and deliver better value for all parties.
“And so I believe that whilst this repeal is going to be widely well received, there are still significant challenges in adoption and the evolution of the UK contracting market.”
The great news is that the administrative burden placed on end users will be greatly reduced, and sensible application of the rules at PSC level will allow the contracting market to revert to where it was a few years ago.
We must all remember that the current measures remain in force until April 2023 and therefore current measures should not be unravelled until then, however planning will be required for those contractors you have ending assignment on or around the end of the tax year, and of course for those workers that straddle the date of repeal.
It is then a waiting game to see how HMRC intend to approach this, it is highly likely that major breaches will still be pursued, and we may yet have a new government before HMRC is out of time to bring claims, which could lead to a flood of cases relating to this period.