The Rollercoaster that is: IR35 and the Off Payroll Working Rules

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At the time of publishing this article, the current government policy is to maintain the changes made in 2021 to IR35 in the private sector. It is difficult to guarantee or predict whether a further U-turn is on its way in advance of the Autumn Statement due on 17 November. In this article, we discuss all possible consequences of any changes being made to IR35, and what that could mean for businesses.

So, what on earth has been going on in the House of Commons?

There has been a great deal of back and forth concerning reforms to the IR35 rules.

The IR35 rules were tax legislation introduced in 2000 to tackle perceived tax avoidance schemes and reduce the disparity in the amount of tax paid by people supplying their services through an intermediary and then paying themselves in dividends. In short, IR35 was designed to close a loophole that allowed an individual to hide behind a company of their own creation (termed a “Personal Service Company” or “PSC”), and claim that the company was employed rather than the individual. This allowed them to pay less taxes.

Under the original IR35 rules, it was the contractor’s responsibility to decide whether they were an employee under IR35, or whether they were genuinely self-employed.

In order to increase the effectiveness of IR35, changes were introduced to the public sector in 2017. This required the company receiving the services (or the “End User”) to determine whether IR35 applied, rather than the contractors. If the worker was caught under the IR35 rules, Income Tax, employee and employer National Insurance contributions (“NICs”) and the apprenticeship levy (if relevant) were payable in respect of ‘deemed employment income’.

From April 2021 (one year later than planned), these changes were also applied to private companies (other than those deemed “small”). This change took the responsibility of determining tax status away from the individual and their Personal Service Companies, and placed it upon the companies they worked for (End Users). See our previous article here.

This remained the case until the government decided to scrap this responsibility for End Users in its recent ‘mini-budget’ on 23 September 2022 by stating that the government would simplify the IR35 rules and repeal the 2017 and 2021 reforms.

This was again reversed by Chancellor Jeremy Hunt on 17 October 2022, when he announced that the IR35 reforms of both April 2017 and April 2021 would be staying.

At the time of writing, there have been no more updates.  

So, where does this leave us?

With the latest change in policy confirming that IR35 rules will remain in place, it is important to accurately summarise the position moving forward.

Under the Off-Payroll Working Rules, the position for all private companies (save for those which are “small”) mirrors the rules for the public sector which came into force in 2017. The responsibility for making IR35 status assessments now rests with the End User. Any End Users engaging a worker have to determine whether the IR35 rules apply. Where the rules apply, Income Tax and employee NICs must be deducted from fees and paid to HMRC and the End User is required to account to HMRC for employer NICs and the apprenticeship levy (if relevant).

A private company is considered “small” if it satisfies two or more of the following requirements:

  • Its annual turnover is not more than £10.2 million;
  • Its balance sheet total is not more than £5.1 million; and
  • It has no more than 50 employees.

This is a relatively low bar, and it is plain that the intention of the legislation is for it to apply to the majority of UK companies.

Determining an individual’s employment status

There are various factors which indicate that a Worker might have deemed employment status.

These include:

Control – What degree of control does the End User have over what, where, when and how the Worker carries out work?

Right of Substitution – Is the Worker obliged to provide their services personally, or can they send a substitute?

Mutuality of obligation – Does the Worker have an obligation to provide their work or skill?

There are also online aids to help employers in their efforts to assist HMRC in the categorisation of their workers. The ‘CEST’ tool has been developed by HMRC so that employers can ascertain the answer to the question of ‘to be (self-employed) or not to be (self-employed)’. End Users will answer questions about the worker, and the CEST tool will conclude that there is

  • ‘Deemed employment’ (i.e. the individual is using a PSC to avoid taxes); or
  • No ‘deemed employment’ (i.e. the individual is actually self-employed).

Companies should also be careful to ensure that the duties and procedures they have been adhering to are not forgotten.

  • The End User must take reasonable care in ensuring that all employees are determined within the appropriate tax categorisation.
  • If the company undergoes a status determination for one of its workers, it must provide the worker with a ‘Status Determination Statement’ confirming the outcome of the decision.
  • The End User must allow the PSC to make representations if it disagrees with the determination.

What if the government decides to U-turn again?

If the government decides that it, in fact, does wish to return to the pre-2017/2021 regulations, and shifts responsibility of declaring employment status back to the worker, what will be expected of businesses?

On the one hand, the End User will have far less responsibilities in determining the status of their workers. This will reduce the liability on companies and will likely reduce the administrative costs of a company that frequently uses workers who claim to be self-employed.

Companies should be aware that returning IR35 to its pre-2017/2021 status would not release them from all responsibilities concerning anti-tax avoidance. Two corporate criminal offences were introduced into the Criminal Finances Act 2017 and ensure that all business now have to be aware of, and prevent, tax evasion. These offences can make a business vicariously liable for the fraudulent acts of its employees and other persons 'associated' with it, even if the senior management of the business was not involved or aware of what was going on.

It is therefore important all companies remain diligent whether or not IR35 directly affects the End User or not.

Moving forward

It is possibly a good idea to ensure that any consultancy agreements drafted for contractors operating through PSCs contain provisions that the contractor will comply with their relevant tax duties. This will ensure that the repercussions of the contractor’s wrongdoings do not affect the company through corporate criminal liability.

Finally, this area of law clearly remains unresolved. There are a number of moving parts in the current political sphere and government U-turns are never out of the question. This could come under review again, so keeping an eye on how this change is anticipated will be crucial.

This article was also written by Gregory McManus, Trainee Solicitor.
Holly Freuchen

Holly Freuchen Associate

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