Repeal of the IR35 reforms (just kidding)

Shock, joy, concern...

You may have experienced a wide range of emotions following Chancellor Kwasi Kwarteng’s mini-budget on Friday (23 September 2022). Did you spot amongst it all that the newer IR35 rules (aka the Off-Payroll Working Rules) would be repealed from 6 April 2023?

Many Microsoft Partners will have welcomed the announcement as the IR35 reforms, which were rolled out in 2017 for public sector and 2021 for certain private sector entities, have proved restrictive and admin heavy to put it mildly.

However, for those companies who have dedicated significant time and money towards compliance, this change in approach will prove frustrating certainly in the short-term.

Wait…what’s happening?

The proposal is that from 6 April 2023, the newer IR35 reforms will be repealed.

The newer IR35 reforms made medium and large private sector companies and public sector entities responsible for determining whether any contractors they engaged were ‘disguised employees’ and deduct amounts for NI and tax from fees if they were disguised employees.

Why is the government proposing this?

The repeal forms part of Prime Minister Liz Truss’ Growth Plan 2022:

• This sets out the government’s plan for reaching its target of achieving a 2.5% trend growth rate.
• This reversal of the reforms is stated to be the first step towards simplification of the tax system.
• It is designed towards freeing up business resources that could be used towards other priorities.
• The government also believes that the repeal will reduce the risk that genuinely self-employed contractors will be caught by the IR35 legislation.

What is IR35 again?

The IR35 legislation was introduced to combat a particular form of tax avoidance.

Contractors would provide their services through an intermediary (usually a personal services company (PSC)) to an end client. In turn, the client wouldn’t need to deduct income tax or National Insurance contributions (NICs). Instead of paying the contractor directly, the client would pay the PSC.

From there, the PSC could pay themselves (i.e. the contractor) a small salary falling below the minimum threshold required for NIC or income tax deductions, topping up this amount through the payment of dividends (which are NIC-free and tax free up to £2,000).

Under the original legislation (from 1999), contractors were responsible for determining whether they were ‘disguised employees’ of the client.

HMRC determined this led to repeated improper assessments of employment status with the resulting loss of an estimated £700 million in tax revenue per year. So that led to the introduction of the recent IR35 reforms (2017 and 2021).

As a result of these reforms, the responsibility for assessment of employment status shifted from the contractor to the end client. So if the end client is a public body or a medium- or large-sized private sector entity, it is the end client’s statutory obligation to assess and make a status determination statement identifying whether the contractor is genuinely self-employed or a disguised employee of the end client.

If the contractor was deemed to be a disguised employee, the organisation paying the PSC was required to deduct appropriate NICs and income tax from the fees owed to the contractor.

Failure to make an accurate status determination could result in the end client being responsible for any unpaid NICs and taxes, plus penalties imposed by HMRC.

What challenges did Microsoft Partners face?

The IR35 reforms proved extremely controversial from the beginning:

• Lack of a statutory obligation on contractors to provide information and an absence of clear guidance on what constituted a ‘disguised employee’ meant that companies struggled to carry out status determination assessments.
• Microsoft Partners engaging large numbers of contractors operating via an intermediary found the status assessment and challenge process administratively burdensome and confusing.
• MSP’s clients were impacted too so many companies started including prohibitions on the use of contractors in contracts with their suppliers so as to avoid any unwanted tax risks.
• This resulted in contractors increasing their fees or abandoning contract work entirely even if they were genuinely self-employed carrying out engagements for MSPs and their clients.

Although HMRC had estimated the cost to businesses of IR35 compliance to be just £35 per PSC (which seems on the light side to say the least), the government believes that repealing the reforms will boost growth by enabling businesses to reduce their costs and use this money towards developing their companies.

What does this mean?

The repeal means that:

Contractors (rather than end clients) will once again be responsible for assessing their employment status on an engagement-by-engagement basis and making any appropriate tax deductions.

However, given that that HMRC previously identified that this approach was leading to an estimated £700 million per year in lost taxes, it is unlikely that this approach will remain untouched.

The government has pledged to keep IR35 compliance under review post-April 2023 and it is possible that additional or replacement rules may be imposed. At this time, what these rules may consist of is unknown.

More information may be forthcoming in the next few weeks so watch this space!

What do I need to do now?

Right now – nothing different. Keep complying with the current rules!

The IR35 reforms remain in place until 6 April 2023, so until that date you will need to continue to assess and issue status determination statements for any contractors operating via PSCs that you engage.

The government has not yet indicated the approach that HMRC will take towards enforcement during the transition period up to 6 April 2023, so for now it is important that you comply with the current IR35 rules and ensure that your underlying contracts (both with your own clients and any contractor intermediaries) are as robust as possible.

If you have any questions on your company’s approach to IR35 compliance or regarding what the repeal means for your business, please get in touch!