On 23 September 2022, as part of the Government's 'fiscal event', the Chancellor unexpectedly announced that the Government plans to repeal both the public and private sector off-payroll working tax reforms introduced in April 2017 and April 2021 respectively. The repeal is expected to take effect on 6 April 2023, although existing rules will remain in force until then.
Why was IR35 introduced?
The off-payroll working rules were introduced to try to ensure that where individuals provide their services through an intermediary entity, most commonly a personal service company, they pay the right amount of income tax and national insurance contributions particularly if that individual would have been treated as an employee (and been taxed accordingly) if they had supplied their services directly. This was intended to work by placing the compliance (and non-compliance liability) on the end user of those services, being public bodies and medium and large enterprises. ('Medium' and 'large' have specific meanings related to headcount, turnover and balance sheet value.)
Prior to the introduction of the off payroll working rules, the IR35 regime applied universally. That regime (which still applies where the end user is a 'small' organisation in the private sector) places responsibility for determining the individual's employment status and paying any tax due on their earnings on the intermediary. As intermediaries are usually limited companies with limited or no assets, effective enforcement of the rules by HMRC proved very difficult. Following the repeal of the 'off-payroll working rules' the responsibility for all such contracts is expected to revert to the relevant intermediary entity,
What will this change mean?
Hiring organisations which have adapted their contractor procurement processes and standard documentation to accommodate the 2017 and 2021 changes will wish to keep the progress of the legislation under review and update (and potentially simplify) their approach accordingly. It would be sensible to maintain good communication with current contractors working under these arrangements. Part of any discussion may include the costs of procuring services, since one possible consequence of the current approach may have been to inflate costs up through the supply chain as contractors demanded higher rates to address the fact that tax was now being deducted at source. In principle however, these changes should not fundamentally alter the analysis of whether an individual is liable to tax and National Insurance as an employee – what changes is who is liable for any sums that are due).
The apparent demise of the off-payroll working rules should not, however, be taken to suggest that hiring organisations and their advisers are now free of risk or obligation (and indeed the current responsibilities and liabilities do continue until April 2023). Abusive and sham arrangements can result in liabilities for hirers, even if an intermediary company is used to engage contractors. Further, the Criminal Finances Act 2017 means that it will be an offence for those advising an organisation to facilitate tax evasion. Organisations will therefore need to be aware that advisers have to have regard to the reality of the situation and will not be able to assist them to put in place sham arrangements that result in an underpayment of tax.
This change also does not affect businesses that hire contractors directly as sole traders. The business has always been, and remains, responsible for ensuring that such contractors are genuinely self-employed and, if not, treating those individuals as workers or employees and deducting tax and National Insurance accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
