Off-Payroll Rules (IR35): back to the old routine.

As part of the mini-budget, and the Government’s Growth Plan which seemed super-sized if anything, the Chancellor Kwasi Kwarteng announced a U turn to recent reforms, and a simplification of the IR35 rules. This will undoubtedly be well received by businesses who have grappled with the thorny issue of deciding the status of their contractors since reforms in 2017 and 2021.

IR35 in the spotlight ?– IR35 legislation was introduced to tackle tax avoidance where individuals provide their services through an intermediary, a personal service company for example, in an attempt to avoid paying employee income tax and national insurance contributions. ?

Originally, contractors were responsible themselves for making a determination on their employment ?status. In broad terms, the legislation asks whether the worker would have been an employee of the client if the employee had been working directly for it (rather than for the intermediary). The obligation was on the worker/contractor to assess the reality of the working arrangement, make the decision, and tax accordingly.

What Changed? Unsurprisingly, HMRC decided to shift the obligation to medium and large companies to make the assessment and determination (users of the CEST tool will be familiar with the shortcomings) and account for tax, instead of taking each individual contractor to task over suspected noncompliance. Given the obvious challenges and effort required against the sums recoverable this may well impact on collection.

What now??The Growth Plan will take ‘complexity out of the tax system’, and the reforms made in 2017 and 2021 will be repealed from 6 April 2023. Individuals providing their services, via an intermediary will, again be held responsible for making the determination on their employment status, and taxing accordingly.

And Why? The intention is to ‘free up time and money for businesses that engage contractors’. This reform will undoubtedly reduce red tape and paperwork, and allow businesses to engage with contractors.

What next? ?Much time and effort goes into drafting contracts seeking to reduce the risk of IR35 applying, such as including the right of substitution, avoiding an obligation to provide and accept work, work structured in regard to projects, rather than duration. ?These considerations will however remain important, even where the accountability for tax and National Insurance contribution falls to the individual contractor. If the practical day to day arrangements are not reflected in the contract for services, deemed employment status becomes a risk where a contractor is no longer required, or the relationship sours. Businesses should still contract with thought for the commercial needs, and risks including unfair dismissal, discrimination, and holiday pay claims even if IR35 no longer the bogey man.

Francesca Lilley

#minibudget #ir35 #hmrc #incometax