Myth-busting facts about the latest IR35 changes

Since the announcement of the Government’s plans to repeal the IR35 Reforms (off-payroll working rules) in the mini budget last month, there has been much confusion about what this means. To give some clarity, IR35 will remain and has not been repealed. Here are some myth-busting facts about the latest changes:

Question: In April 2023, what changes to IR35 will there be?

Answer: IR35 refers to two pieces of deemed employment legislation as follows:

1. Chapter 8 of the Income Earnings and Pensions Act 2003 – the Intermediaries Legislation: The original IR35 rules, dating back to April 2000
2. Chapter 10 of the Income Earnings and Pensions Act 2003: The off-payroll working rules which were implemented into the public sector in 2017 and came into effect for medium and large companies in the private sector in 2021

There are differences between both sets of rules but, simply put, under the:

Original rules: contractors held the responsibility for assessing their status and were liable for the tax

New rules: hiring organisations held the responsibility for assessing their status and were liable for the tax

When the IR35 Reform was proposed back in 2015, the intention was that it would be replaced and rebranded as: ‘off-payroll working’. Following consultation, the Government made the decision that the new rules would only apply to medium and large organisations, given the burden it would cause for small businesses. Therefore, and confusingly, both sets of rules were used differently but both were still referred to as ‘IR35’.

From April 2023, the rules will revert back to how they were before: contractors will undertake their own assessments and will hold responsibility for the tax.

Question: Has IR35 been axed?

Answer: No, IR35 has not been axed. The Chancellor of the Exchequer, Kwasi Kwarteng, plans to repeal the IR35 Reforms which were implanted in 2017 and 2021. The original off-payroll working rules will stay in place, despite this.

Question: Can contractors now work outside IR35?

Answer: Contractors should assess their status correctly and pay the appropriate taxes. Doing nothing is deemed as being careless in tax terms. If no status determination is in place and HMRC issues a tax bill, they can:

• go back six years for carelessness
• add 30% penalties in addition

Question: From April 2023, can contractors revert back to using a limited company?

Answer: From 2017 and 2021, contractors were still able to operate via their limited companies. Despite this, some companies were not prepared to use contractors who operated in this way.

Given the level of risk owing to flaws within the legislation, some businesses implemented a ban against using contractors who operated via a limited company. This meant an increase in costs and potentially being unable to use their preferred contractors.

Owing to potential tax compliance issues, companies will not instantly allow contractors to now use a limited company and from April 2023, contractors should not ignore IR35, ensuring that they remain open and honest without the avoidance of tax.

Question: Will companies remove blanket IR35 bans?

Answer: It is expected that there will be a slow return to companies allowing contractors to use a limited company on the basis that they are ‘outside IR35’. Organisations are likely to want to remain secure and will expect recruitment agencies to provide evidence that due diligence has been taken.

In terms of blanket bans, to re-engage contractors on an ‘outside IR35’ basis, companies will want to see proof of an independent assessment to ensure that they are compliant and are not facilitating tax avoidance.

There will also be a variety of complex matters to think about regarding changes with existing contractors. They cannot, for example, have workers leave at the end of the week as on-payroll workers and return at the start of the following week as limited company contractors. This ‘Friday to Monday’ situation was a key reason for the implementation of IR35 in April 2000.

I short, the transition back to the old rules will be slow and organisations will be cautious with their engagements.

Question: Will I still need to use an umbrella company, given the IR35 changes?

Answer: Umbrella companies can be beneficial for contractors, particularly when they are undertaking small projects for numerous companies. They are a useful alternative for a contractor to being on the company’s payroll.

Most contractors will choose to operate via a limited company if an engagement is outside IR35.

Some contracts have been only open to umbrella companies, whereby organisations engage a contractor and treat them like an employee – we may see this continue.

Question: What was the reason for off-payroll being repealed?

Answer: According to the Chancellor, the reforms to off-payroll working have caused unnecessary complexities and costs for many organisations.

Given flaws within the legislation, the outcome of which was a hugely disproportionate tax risk in comparison to the Treasury’s projected tax loss, large organisations ceased to engage limited company contractors. The result of this was increased costs and work being directed overseas.

The Check Employment Status for Tax (CEST) tool, which was provided by HMRC, was deemed unreliable and misaligned with case law and therefore not fit for purpose.

Given the absence of a tax offset, this meant that, where HMRC enforced the legislation in either sector, the contractor paid zero tax and the ‘deemed employer’ had to pay the contractor’s tax bills.

HMRC trained Government departments to use CEST in the public sector but, despite this, tax bills of over £263 million were generated through misclassification. The policy therefore deteriorated and was unsuccessful.

Question: Why should contractors be wary of Managed Service Company legislation?

Answer: Managed Service Company (MSC) Legislation came into effect in 2008 and was introduced to stop tax avoidance owing to the promotion and facilitation of limited companies on a large scale.

If, for example, a contractor’s company is deemed an MSC, they are liable to pay tax irrespective of the tax position – the same as being caught by IR35. In addition, the contractor, their accountant or the agency directors can be made personally liable for the tax debt.

In addition to large scale accountant-like businesses who provide limited companies to contractors, which the legislation was initially designed to target, recruitment agencies can also be considered a Managed Service Company Provider (MSCP). To be considered as a MSC, a contractor’s limited company needs to be ‘involved’ with a MSCP. Amongst the criteria for ‘involved is if the MSP provides or promotes an undertaking to make good any tax loss. This tax loss trigger is the reason why contractor accountants avoid engagements with companies that sell tax loss-based insurance.

Question: Will the repeal of the IR35 Reforms go ahead?

Answer: For the changes to take place, the Finance Bill needs to go through Parliament, which usually commences in November and takes a few months. It is important to keep an open mind at this stage, given the previous delays and proposed delays which have occurred, including:

• a one year delay of the off-payroll reform roll-out to the private sector only twenty days prior to when it was due to commence back in April 2020
• an almost two-year delay following campaigning and votes for Amendment 20 in July 2020, but which ended up not gaining enough votes from rebel Tory MPs to go ahead

I short, you can start preparing but it is business as usual until the law changes.

Question: For the time being, what should organisations, agencies and contractors do?

Answer: Until the Finance Act is amended by a Finance Bill, organisations, agencies and contractors should comply with off-payroll working rules which continue to be the law.

Those with compliant set-ups and contractors operating outside IR35 can remain as they are. Those who no longer hire limited company contractors can re-consider this exclusion in preparation for 6 April 2023 in order to attract and retain talent.

Those contractors who think that they operate outside IR35 should assess their status in order to protect themselves from the tax risk.

The announcement of the Government’s plans to repeal the IR35 Reforms (off-payroll working rules) indicates a really positive step forward in support of the contracting industry.