On 23 September 2022 chancellor Kwasi Kwarteng unveiled his mini budget and, in just a few words, signalled his intention to repeal the off-payroll working (OPW) rules colloquially referred to as the IR35 reforms.
The legislation first entered the statute in 2017, when it took effect in the public sector, before being rolled out to the private sector in 2021 and was not well received by businesses.
The government’s Growth Plan document indicated why the chancellor decided to repeal the legislation from April 2023; he wants to free up time and money for businesses that engage contractors to fund other priorities, while also minimising the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.
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Kwarteng said he wants to stoke growth, and he appears to have listened to private sector businesses which had been forced to wade through the legislative slurry of OPW since April 2021.
However, whilst cries of IR35 is dead echoed through social media, the reality is that IR35 will remain in the form of the original Intermediaries Legislation. HMRC will now seek to enforce legislation that costs the Treasury £1.2 billion annually.
It would be unwise for all parties throughout the supply chain to expect a return to the days of facilitating widespread non-compliance with the rules. Businesses, recruitment agencies and contractors must prepare well for what may happen next.
A win-win situation for all
So, let’s take a retrospective look at the last 20 years at the IR35 coalface and weigh up the impact of the various attempts to crack down on false self-employment. With that knowledge, we can envisage the likely legislative changes and future enforcement activities and consider how all parties should prepare.
According to HMRC figures, before OPW, there were around 180,000 workers who were engaged via their own Personal Service Companies (PSCs) who were likely to be deemed employees. They had been encouraged to take on tax risk and denied employment rights.
OPW fixed the issues with that group of workers; from that perspective, considerable gains were made, especially on rights.
Unfortunately, the tax policy overreached. We saw many people who genuinely were their own boss but whose self-employment rights were taken away, having been forced to become employees against their will or the position in law. That’s not a win.
And there’s the glitch. When the rights campaigners win too well, the self-employed lose, and vice-versa. Everyone needs to win. Everyone needs to work together to get it right. HMRC can then collect the correct amount of tax, and those workers who should get rights will receive them.
How might IR35 legislation and enforcement change?
Under OPW, firms were handed an enormous tax liability, grossly disproportionate to the perceived tax loss due to flaws relating to a lack of tax offsetting provisions in the legislation. In my view, the sheer size of this legislative stick, combined with the complexity of assessments, led many firms to adopt a policy of banning the use of limited company contractors in their supply chains.
It was the sensible decision to make, despite the damage it may have caused them.
When firms engaged with the legislation, those with professional tax advisors still took a risk-averse approach when hiring contractors on an outside IR35 basis.
The introduction of a status determination statement and debt transfer related to reasonable care worked very well, forcing all parties to make considered status determinations rather than blindly ignoring the legislation, which had been happening for over two decades.
Unfortunately, and due to the complexity of the legislation, some firms were led into quick-fix-based solutions and succumbed to salespeople selling solutions with claims that the firm would never be liable for the tax. I’m referring to cheap gimmicky tax loss insurance-led solutions, whose caveated policies were only ever likely to cover those that would never really have a problem.
As HMRC well knows, these types of policies create moral hazard, which is why it appears in the managed service company (MSC) legislation. And MSC is where the next big enquiry stick will likely emerge – expect a ramp-up of enforcement.
Another unsavoury aspect was what I term vested assessments, where some firms sought to enter the assessment market but were gateway solutions to selling something else – for example, a payroll solution or insurance product.
When it’s not compliance-led, it’s something else-led, and the answer to what is my IR35 status will suffer from the same unconscious bias that contractors doing their assessments have suffered from for years.
My IR35 sixth sense tells me some elements of OPW and MSC are likely to make their way into intermediaries legislation in due course to re-leverage the good parts of OPW and shut down some of the unethical market behaviour. Empowering agencies via a debt transfer threat to make sure contractors do impartial assessments that adhere to the SDS definitions is an obvious no-brainer.
Like most people, I’m not fond of tax avoiders either, and the sooner we stamp out mass tax avoidance due to ignoring IR35, the better, otherwise, something worse than OPW will return. Sensible changes that help to create a fair behavioural effect would be welcome and align with the chancellor’s stated objectives in section 3.44 of his Growth Plan.
The chancellor’s goals can only be achieved by removing the perils of moral hazard and ensuring that contractors undertake impartial assessments.
How can firms prepare?
Firms should secure their supply chains and make sure they hire people correctly. If they want an employee-like worker, then make sure they are on the payroll, and if they want services-based provision, then make sure the contractor takes reasonable care and is protected.
Some observations and future predictions from working on IR35 enquiries and in tax tribunals are:
- When it comes to IR35, contractors are unable to defend themselves
- General accountants rarely understand the best way to mount an IR35 defence
- Where a client is not supportive, the contractor rarely succeeds
- HMRC use barristers almost every time at IR35 tax tribunals
- The legal costs to reach the end of an FTT hearing can easily be circa £100,000
Firms will not want to risk their reputations by being accused of helping to facilitate large-scale tax avoidance, and they have the CCO obligations from the Criminal Finances Act 2017 to consider. Contagion could occur simply because the contractor cannot afford to be represented appropriately. So, whilst tax loss policies should be avoided like the plague for fear of the MSC legislation, insurance to cover a tax defence should always be taken out.
The move back to the old world will certainly not be a free-for-all. Enforcement will be ramped up, and firms would be wise to pay careful attention to compliance matters and revisit tax issues around their contingent workforce strategies.
Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained