Please note, the information in this blog was superseded by the chancellor on 17/10/2022.
As part of its plan to deregulate and reduce the burden on businesses, the Government announced on 23 September 2022 that the IR35 off-payroll working rules will be repealed from 06 April 2023.
IR35 and the off-payroll working rules
IR35 was originally introduced to prevent individuals from supplying their services through an intermediary (typically their own limited company) and as a self-employed contractor paying far less tax than a PAYE employee despite carrying out a similar role. Under the original IR35 rules it was the contractor’s obligation to determine whether they were self-employed for tax purposes (i.e. whether they were outside IR35 or not), which gave them a strong financial motive for leaning in favour of self-employment.
Amendments were made in 2017 and 2021 that made businesses responsible for assessing whether the work a contractor carries out means they are self-employed for tax purposes. If the contractor would have been considered an employee for tax purposes had they not supplied their services through an intermediary, the amendments made the end business responsible for making the appropriate tax deductions and responsible for accounting to HMRC for the tax, rather than the contractor’s limited company. This resulted in a general decrease in the number of contractors paying self-employed tax rates.
However, the Government’s announcement means that these 2017 and 2021 amendments will be repealed. At the time of writing, the suggestion is that the IR35 rules will go back to what they were pre-2017 in that contractors will once again be responsible for making their own assessment of whether they are self-employed or not for tax purposes, and be responsible for accounting to HMRC for their own tax. The criteria used to assess whether someone is self-employed for tax purposes is not set to change, rather the change relates to who in the supply chain is responsible for carrying out the self-employment assessment and for accounting to HMRC.
How should businesses prepare?
Broadly speaking businesses have welcomed the announcement, as it reduces both their administrative burden and their tax liability. However, the existing IR35 off-payroll working rules will remain in place until April 2023, and (for now) businesses who use these types of contractors will need to continue making the IR35/employment status assessments and continue making the appropriate tax deductions where they are required to do so.
Whilst we wait to see if the Government will implement a new IR35 tax regime in place of the existing one, at least for now it seems the IR35 rules will revert to how they were pre-2017. It should also be remembered that the Government’s plan to repeal the existing IR35 provisions remains subject to Parliamentary approval. Nevertheless, as we move closer to 6 April 2023, businesses who use limited company contractors may wish to review the contracts they use with the limited companies as it is likely amendments will need to be made.
It should also be remembered that businesses cannot wash their hands of responsibility altogether nor can they bury their heads in the sand if they consider a contractor may be covered by IR35. Businesses could commit the corporate criminal offence of facilitating tax evasion if they suspect a contractor will not comply with their IR35 obligations, or if they engage a contractor on an outside IR35 basis having previous assessed them as being inside IR35. Consequently, despite the planned repeal of the off-payroll working rules, businesses will want to take steps to ensure their contractors are properly accounting to HMRC for their tax.
For further information and advice please contact a member of the Employment Team.