UPDATE: On 17 October 2022, the new Chancellor, Jeremy Hunt MP, announced that the current post-2017 IR35 (off-payroll working) regime would be retained, thereby reversing what was announced in the September “mini-budget”.
One of the many radical shake ups from the mini budget last week, was the announcement by the chancellor that the revised off-payroll working rules (commonly known as “IR35”) introduced in the public sector in 2017 and in the private sector in 2021 will be repealed as of April 2023 (subject to parliamentary approval). This is part of the wider government plan to cut red tape and taxes.
Under the current off-payroll working rules, medium and large businesses receiving the personal services of an individual via their personal services company (PSC) or other specified intermediary need to decide whether the relationship is one of deemed employment (inside IR35) or genuine self employment (outside IR35) by carrying out a status determination.
If the engagement falls inside IR35, then the contractor is taxed like an employee with income tax and employee national insurance deducted at source via PAYE. Payment of employer national insurance (and, if applicable, apprenticeship levy) are also required. Depending on the structure, either the end-user client or other fee-payer will have responsibility for operating PAYE.
When these rules are repealed, we will return to the previous situation where all PAYE risk and responsibility for IR35 is borne solely by the individual’s PSC, regardless of the size of the business receiving the contractor’s services.
This may be good news for end-users – the reforms certainly added complexity, administrative burdens and costs to many businesses when hiring consultants. However, it is not clear how easy the transition back will be.
Firstly, many companies, in response to the reform in 2021 spent a significant amount of time and money doing a substantial overhaul of their labour supply arrangements. Some may have decided to stop using contractors all together. Revisiting this just two years later may feel rather unpalatable.
From a practical perspective, those contractors who have been determined by their end-user client as being inside IR35, may be tainted by that determination if their contract continues past April 2023. It may be difficult for such contractors to escape that designation unless they change the way they provide their services or move clients or roles. We may see contractors moving roles in April 2023 to seek to reset their position as they resume control of determining their tax status.
The off-payroll working rules were brought in to target perceived widespread tax compliance failings amongst the contractor population. It is estimated that the revenue will lose £1–2bn of tax per annum as a result of abolishing these rules. It will be interesting to see how HMRC goes about trying to recoup this lost tax after April 2023, and whether additional resources will be diverted towards enforcement against contractor PSCs.
The current regime will continue to apply until April 2023, so businesses will not want to make changes immediately. There is no steer from the Treasury or HMRC as to whether existing or future enforcement (and preceding audit/investigations) of the current rules will now be paused in light of the proposed change. However, it may be sensible to start thinking about this change and opening a dialogue with your contractors ahead of time.
Frances Rollin