Back to the future for off-payroll working

In his ‘mini-Budget’ on September 23, the Chancellor announced that recent reforms to the off-payroll working rules (often referred to as IR35) would be repealed from April 6, 2023. Although a review of the rules was widely expected, it surprised many to hear that those reforms would be scrapped in their entirety with no further consultation.

This article outlines where this announcement leaves us and what it might mean for contractors and those advising them.

The off-payroll working rules – the background

The IR35 rules were first introduced in 2,000 in response to concerns that workers who engage with clients via their own companies (often referred to as personal service companies or PSCs for short) pay less income tax and NICs than those who are employed directly.

Under the rules as first introduced, it was down to the individual worker to decide if, absent their PSC, they would have been an employee of their client.  Where this was the case, the PSC was then required to account for the appropriate payroll taxes. Concerns grew that the rules were not working effectively, with HMRC estimating in May 2018 that only about 10% of people who should comply with the IR35 rules were doing so.

In response to these concerns, new rules were introduced for the public sector in April 2017 and the private sector in 2021.  Under these changes, the responsibility for applying IR35 was taken out of the worker and PSC’s hands entirely. Instead, the end-user client was required to determine whether the rules applied, with the fee payer (which may be the engager itself or an agency depending on the arrangements used) being required to deduct payroll taxes on payments made to the PSC.

What will happen in April 2023?

If the Chancellor’s announcements go ahead as planned then, from April 2023, the IR35 rules will return to how they were prior to the 2017 and 2021 reforms.  This does not mean the IR35 rules are disappearing – instead the responsibility for applying them, and deducting any tax due, will once again lie with the individual workers and their PSCs.

There are a number of unanswered questions as to how this will work in practice, especially when it comes to contracts spanning April 2023.  For example, will there be an element of grandfathering in which the existing rules are applied until the contract finishes, or will there be in effect two separate periods, with the engager / fee payer applying the rules and deducting tax for work performed up to April 5, 2023, and the worker / PSC afterwards?

HMRC’s compliance approach

Given that the 2017 and 2021 reforms were introduced in direct response to HMRC concerns about widespread non-compliance with IR35 by PSCs, it will be interesting to see what approach HMRC will take to compliance from April 2023 once those reforms have been swept away.  Given the existing pressures on HMRC resources, will they have the ability to scale up their compliance work in response?

Concerns have also been expressed that the 2017/2021 changes led to risk averse decisions being taken by end-user clients, with limited ability for workers to challenge what they might see as an inappropriate status decision.

If, after April 2023, a worker does not apply IR35 to a contract spanning that date as they believe their client had been wrong in concluding that it should apply, will this be challenged by HMRC? What effect will previous classification as in or out of IR35 have on new contracts entered into after April 2023?  When the 2017 and 2021 changes were introduced, HMRC provided some reassurance to the contractor community to say they would only use information received to open an enquiry into earlier years if they had reason to suspect fraud or criminal behaviour.  However, there is no indication yet as to whether they will take a similar approach this time round.

In the absence of further detail, the best advice for workers and their advisers is to ensure they take reasonable care in coming to a decision on IR35 status, and gather and retain all available supporting evidence in case of challenge.

Final thoughts

The reversion to the old IR35 rules will be welcome by some, especially those workers who feel they have been miscategorised by risk adverse clients in the past.  However, it shouldn’t be forgotten that it will also mean an increase in compliance burdens and risks for PSCs and their owners.

It’s also possible that, after April 2023, we will see the same issues with non-compliance as we did in the past.  The ATT have encouraged the Government to look again at what can be done to simplify the rules, increase education and understanding and support new approaches to compliance within HMRC.

We would also like to see the Government take a bold approach and address the real elephant in the room – the differing tax burdens placed on employment and self-employment.  If this issue is properly addressed, we may be able to do away with the need for such complicated rules as IR35 for good.