The Chancellor of the Exchequer, Kwasi Kwarteng, revealed the excellent news in his mini-budget on 22nd September 2022 that the Government plans to repeal the Off-payroll (IR35 Reforms). Since then, considerable confusion has spread across social media platforms, the most common mistake being that "IR35 has been repealed". It hasn't, and IR35 will remain. Let's provide some clarity.
1 - Has IR35 been scrapped?
No. Nothing has been scrapped, and "IR35" is not being scrapped either.
The Chancellor has said he plans to repeal the Off-payroll working rules ("IR35 Reforms"), which were introduced in 2017 and 2021. Despite the repeal, the original IR35 rules will remain in place.
2 – What are the IR35 changes for April 2023?
Confusingly, "IR35" is a catch-all word that refers to two pieces of "deemed employment" legislation. The Off-payroll working rules (Chapter 10 of the Income Earnings and Pensions Act) 2003 were introduced into the public sector in 2017 and extended to the private sector in 2021 for medium and large companies.
The original IR35 rules date back to April 2000 and are Chapter 8 of ITEPA 2003, the Intermediaries Legislation.
Whilst there are nuanced differences between the two sets of rules, in basic terms, under the original rules, contractors were responsible for assessing their status and were liable for the tax. Under the new rules, hiring firms took on the responsibility for assessments and tax liability.
When "IR35 Reform" was first mooted in July 2015, the plan was to replace the old with the new entirely and rebrand it as "Off-payroll working". But, after consultation, Ministers decided the burden on small businesses would be too much, so the new rules only applied to medium and large companies. Therefore, both sets of rules were used in different ways, causing confusion, which wasn't helped by them being referred to as "IR35".
The new rules are being dispensed with, reverting to how things were before. Contractors will make their assessments and bear the tax liability if they get it wrong.
3 – Will the repeal of the IR35 Reforms happen?
For the changes to happen, we need a Finance Bill to go through Parliament in the usual way, which typically starts around November and takes a few months.
Nothing should be taken at face value at this stage. Readers are reminded that the Off-payroll reform roll out to the private sector was tabled to start 6th April 2020, and it was only 20 days before, on 17th March 2020, that the then Chief Secretary of the Treasury, Steve Barclay, announced a 1-year delay at the 1st Reading of the Finance Bill.
Months later, campaigning by the Stop the Off-payroll Tax team almost managed to force a further two-year delay on 1st July 2020, when Amendment 20 was voted for, including support by all opposition parties, but which failed to garner enough rebel Tory MPs.
So, the simple answer is: It's business as usual until the law changes, but in the meantime, start preparing.
4 – Can contractors now work "outside IR35"?
Surprisingly, some contractors appear to have been entirely unaware of the original legislation and only came across IR35 when the new reforms came in.
In tax terms, doing nothing is being "careless", and with no status determination in hand, if HMRC knocks on the door and issues a tax bill, they can (a) go back six years for carelessness and (b) add 30% penalties on top.
Contractors are not automatically "Outside IR35" and should assess their status correctly and pay taxes accordingly.
5 – Can contractors go back to using a limited company from April 2023?
Contractors could continue operating via their limited companies after 2017 and 2021. Still, because of flaws within the legislation, the level of risk meant that some firms were not even prepared to consider engaging contractors who operated via a limited company.
Given the consequences of those flaws, for some firms, the least painful and quickest option was to use a blanket ban, despite the damage it may have caused their business by cutting off potential supply to the best contractor talent. The other consequence was increasing costs.
Firms won't immediately allow their existing contractor workforce to now use a limited company because of other tax compliance issues they face. Post-April 2023, contractors should not expect it to be a free-for-all to start engaging in large-scale tax avoidance by ignoring IR35.
6 – Will firms lift IR35 blanket bans?
There is more likely to be a gradual and considered return to allowing contractors to use a limited company, provided they are actually "Outside IR35". Hiring firms are highly likely to continue to secure their supply chains and expect recruitment agencies to prove proper due diligence is taken.
For blanket banning firms, the route from the old rules to the new rules wasn't painful, but it was a simple decision. To re-engage contractors on an "Outside IR35" basis, they will want to see proof of an impartial and proper assessment to ensure they meet their compliance obligations and cannot be accused of facilitating tax avoidance.
Firms will also have numerous nuanced issues to consider around any transition with existing contractors (who now have rights). They can't be seen to have workers leave on a Friday as an on-payroll worker only to come back on a Monday as a limited company contractor. The "Friday-to-Monday" scenario was one of the reasons for IR35 being introduced in April 2000.
The transition back will be gradual and carefully considered.
7 – Do the IR35 changes mean I won't have to use an umbrella?
Using an umbrella company should always be a choice by the contractor as an alternative to being on the agency payroll. Umbrellas can be advantageous for contractors, especially when flip-flopping between agencies multiple times a year on small engagements.
Where an engagement is outside IR35, one would expect most contractors to operate via a limited company.
Whilst some contracts have been offered "Umbrella only", this may continue where firms have decided they want to engage a temporary worker and treat them like an employee.
8 – Why was Off-payroll decided to be scrapped/repealed?
The Chancellor said that the "reforms to off-payroll working have added unnecessary complexity and IR35 cost for many businesses." He is right, of course.
Due to the inherent flaws within the legislation, which resulted in a grossly disproportionate tax risk compared to the Treasury's perceived tax loss, large firms refused to engage limited company contractors. This drove up costs and forced work overseas.
HMRC's Check Employment Status for Tax (CEST) tool was widely reported as not fit-for-purpose, and the recent IR35 case of Atholl House at the Court of Appeal clarified aspects of case law which were contrary to HMRC's known position. CEST was exposed as misaligned with case law and unreliable.
The lack of a tax offset meant that where HMRC enforced the legislation in either sector, the contractor ended up paying zero tax, with the "deemed employer" having to pay the contractor's tax bills.
Despite HMRC spending considerable time training Government departments who were all encouraged to use CEST in the public sector, tax bills of £263m+ were racked up through misclassification.
Despite the best intentions, the policy unravelled and failed.
9 – Why should contractors now fear the Managed Service Company legislation?
The brutal Managed Service Companies Legislation ("MSC legislation"), which came into force in 2008, is designed to combat tax avoidance due to the promotion and facilitation of limited companies on a large scale.
If a contractors limited company is considered an MSC, then tax is payable like being caught by IR35, irrespective of the tax position. Worse, the tax debt can be transferred to the contractor personally, their accountant personally, or the agency directors, personally. The impact is people will lose their homes.
Whilst the legislation was initially designed to target large-scale accountant-like firms providing limited companies to contractors; there are provisions whereby recruitment agencies can also be considered a Managed Service Company Provider ("MCSP").
For a contractor's limited company to be considered a Managed Service Company ("MSC"), it needs to be "involved" with a Managed Service Company Provider. One criterion for "involved" is whether the MSCP "gives or promotes an undertaking to make good any tax loss." The tax loss trigger is why specialist contractor accountants avoid associations with firms that sell tax loss-based insurance like the plague, and agencies should do so too.
Only this year, in March 2022, two large contractor accountant firms fell foul of the MSC legislation, leaving thousands of contractors needing help with appeals.
10 – What should businesses, agencies, and contractors do now?
For now, businesses should comply with the Off-payroll working rules because they remain law until the Finance Act is changed by a Finance Bill.
Firms with compliant regimes and contractors operating Outside IR35 can continue in the same way. But when firms have implemented policy decisions to disallow limited company contractors, they can consider reversing those decisions, ready for 6th April 2023, to retain talent.
All contractors who believe they should be operating "outside IR35" should begin assessing their status and protecting themselves for when the tax risk passes. See IR35 Shield for more details.
The Conservatives are finally supporting the self-employed
The Conservative Party have finally taken back control of the bureaucrats at the Treasury and begun to unwind the approach the Treasury has adopted towards the self-employed for the last 20 years – which is to consider them as tax dodgers.
The most crucial point to understand is that the announcement signals a massive sea-change and is a positive step from the Government that champions the contracting industry.
The Liz Truss Government is very pro-growth and fully understands how valuable contractors are to the economy.
Contracting is back!