Businesses warned of IR35 uncertainties despite reform u-turn

Accountants have warned that uncertainties around IR35 remain despite damaging reforms being scrapped in line with the UK’s Growth Plan.

UK Chancellor Kwasi Kwarteng announced the repeal of the 2017 and 2021 reforms to the off-payroll working rules as part of last month’s ’Mini Budget’ statement.

The unexpected move, which comes into force next April, likely came as a relief to many firms who will no longer carry the burden of proving a contractor’s tax status.

“Scrapping these poorly thought-through, unnecessary and burdensome regulations at a time when we need more people to choose self-employment and start-up in business, is welcome,” said Martin McTague, national chair of the Federation of Small Businesses.

Absence of detail

However, Dave Hedges, tax partner at Azets, believes there’s “an absence of fine detail” around how HMRC will manage the transition over the coming months.

“While the changes are welcome and have been lobbied for, we are advising clients throughout the engagement chain to tread carefully pending clarification,” he said.

Hedges pointed out that the written follow-up information published the day after the Chancellor’s speech offered little information beyond confirmation of the repeal.

“The briefness of the initial announcement suggests there will now be significant drafting work being undertaken.

“We may not receive any detailed guidance until early in the new year.”

Will claims be pursued?

Hedges also believes a key issue will be how enthusiastically HMRC pursues claims up until April 2023, or whether it decides to take a lighter touch.

“This is to some extent an unknown, although the earlier changes introduced in April 2021 for medium and large end users in the private sector did come with some intent from HMRC that they would not routinely carry out retrospective reviews,” he said.

John Williams, employment tax director at Moore Kingston Smith, warned that businesses subject to off-payroll working regulations must apply the rules until April 5, 2023.

“HMRC still has the power to perform compliance checks to ensure that the rules have been complied with and are likely to feature in future PAYE compliance reviews,” he said.

Penalties may be levied

Williams pointed out that penalties could still be charged if an organisation is found to be non-compliant in the short two-year period that the off-payroll working rules apply.

“Businesses that haven’t applied the rules accurately to date, or are uncertain how to apply them, should act now by reviewing procedures to ensure compliance and minimise the risk of penalties,” he added.

While Williams believes the reforms will help reduce the administration and tax burden for business using limited company contractors, he highlighted their frustration.

“They are wondering why they’ve been forced to spend large amounts of money and time on implementing robust systems to deal with rules that are to last for a short period.

Ongoing lack of clarity

Williams also insisted the rules on determining employment status under IR35 remained unclear, particularly given the “inconsistent outcomes from case law” and inadequate HMRC guidance.

“To improve compliance under IR35 and provide contractors with clarity on the rules, there is a need for the HMRC CEST tool [which helps contractors determine employment status] to be updated and improved,” he said.

Alternatively, he suggested the government introduce a “clear statutory test” of employment status that could clear up lingering confusion.

Blanket bans on contractors

Stephen Kenny, personal tax partner at PKF Littlejohn, expects to hear further information from the government within the expected Autumn Budget in November.

“What I would like to see is some certainty for the contractors who are now going to be based gain with applying these rules,” he says.

Kenny also suggests that the reform repeals may change the types of people that business could consider bringing on-board in the wake of the repeal.

“A lot of businesses who previously used contractors introduced blanket bans on them because IR35 had increased the cost of engaging with them,” he says, adding that  businesses will now be freed from extra costs.

Foreign intermediaries

However, he points out that some anomalies potentially remain that will need further clarification over the coming months.

“Businesses need to be aware that if they are employing contractors, and these are foreign intermediaries, that can cause issues.

Similarly, Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, argued that despite the “tremendous boosts for contractors”, caution is advised in the short term.

“As delighted as we are with the news, we remain concerned that the underlying IR35 rules will stay in place, and we hope to work with the government to make further progress on this issue in the weeks and months ahead,” he said.