On Friday 23rd September 2022, the Chancellor of the Exchequer, Kwasi Kwarteng announced that the 2017 and 2021 changes to Off Payroll Working (IR35) are to be repealed. Whilst welcome news for Contractors and those that campaigned against the reforms, is it that easy to turn the clock back. Here are some of the questions that we are being asked.
Is IR35 dead?
No. IR35 is not being removed. The legislation will revert to its original format under Chapter 8 ITEPA 2003.
What is changing?
From April 2023, the responsibility for determining IR35 status reverts back to the contractor. Status Determinations from end clients will no longer be a legal requirement and contractors will have to ensure that they pay the correct taxes, based on their employment status.
We understand the changes apply to all work done up to 5 April 2023, not just payments made.
Does this apply in both the Public and Private Sectors?
Yes -the legislation will be repealed in both sectors.
What’s going to happen between now and April 2023?
This is a difficult question to answer and depends on the stance of end clients. Those who took blanket ban approaches to using Limited companies may take the time to consider the impact of such an approach and whether they wish to reverse this from April 2023 so as not to lose out on access to the best talent.
Those who have properly assessed and issued Status Determinations remain obliged to follow the rules and continue to be exposed to the same risks. Some may choose to stop hiring to limit their risk until after April 2023, so we may witness hiring freezes in some areas.
For any end client who had still not grasped the new rules or had chosen not to apply them, they remain at risk of noncompliance, but we think it unlikely they will change their approach before April 2023, when the assessment is no longer their responsibility.
Will there now be more Outside IR35 contracts available?
Undoubtedly there will be more Outside IR35 contracts available in the market but there are a number of reasons why we may not see the avalanche you might expect. It is likely that we will no longer see contracts advertised Outside IR35.
Will end clients remove their blanket bans on engaging Limited Companies?
The Government certainly seem to think so, citing one reason for the repeal being the need to remove “unnecessary cost and complexity” for many businesses. We would hope to see end clients open up to the idea of engaging with the flexible workforce in a way that encourages growth in the economy.
If end clients have invested time and money assessing IR35 in line with the reform, will they undo their policies? If they don’t, will they face losing the best talent to end clients who will now revert to allowing the use of Personal Service Companies (PSC’s) since the end clients risk appears to disappear?
Will an end client turn a blind eye to a contractor working Outside IR35, when they found the role Inside IR35?
The Criminal Finances Act 2017 effectively obliges companies to take reasonable steps to prevent the facilitation of tax evasion in supply chains and if they fail to do so they can face criminal charges.
This may mean risk adverse end clients, who invested time and money in assessing roles for IR35, find it very difficult to turn a blind eye for those roles they determined to be Inside IR35.
If I am Inside IR35 now, can I re-negotiate to be Outside IR35 from April 2023?
Be careful! If your end client has issued a Status Determination stating your role to be Inside IR35, but you now wish to claim that from April 2023 you are Outside IR35 in the same role, this could be a difficult position to defend with HMRC. The best advice would be to have a clean break and start a new contract elsewhere.
Who is responsible if my IR35 status is incorrect now but not investigated until after April 2023?
The repeal is not set to be retrospective. In the Private sector, the end client will be responsible for the IR35 assessment for the two tax years 2021/22 and 2022/23.
In the Public Sector this goes back and covers the last six years from 2017/18 to 2022/23. If any of these tax years are investigated in the future (subject to relevant time limits), it is our understanding the current rules apply and the end client will need to defend their position.
Can I re-open my Limited company or start a new one?
We expect to see a number of contractors to reverse the decision to close their Limited company or look to open a new one.
When opening a Limited company, you need to be mindful of HMRC’s targeted anti avoidance rules (TAAR). These rules state that if you open a Limited company with the same trade within two years of closing the last you may have to revisit any tax benefits your received when closing your original company, such as the benefit of Business Asset Disposal Relief. Your accountant will be able to explain more around your personal circumstances.
Will HMRC actually investigate IR35 status?
One of the reasons for the 2017 and 2021 reform was to ease the burden of compliance on HMRC. Following reform, IR35 investigations could be aimed at end clients where multiple contractors could be reviewed at any one time. By reverting back to pre-2017 rules compliance becomes more burdensome and will have to be pursued on a one-by-one basis. Does HMRC have the capacity to do this? Despite the additional burden it is hard to believe that IR35 will not be investigated. Whist the reform led to many genuinely Outside IR35 contractors being placed wrongly Inside, it also led to those who had been abusing the rules being more compliant.
It is hard to believe that the Government and HMRC are prepared to revert back to allowing widespread abuse of the rules and so despite the repeal we suspect further guidance, anti-avoidance rules or even sector exclusion lists will be published before April 2023. Once we receive any further details we will advise accordingly.
How else are HMRC targeting contractors?
Even if HMRC do not have the capacity to investigate individual PSC’s they are currently attacking some arrangements by using the 2007 Managed Service Company (MSC) legislation set out in Chapter 9 of ITEPA. In order for the legislation to bite there must be a Managed Service Provider (MSP) involved and influencing the running of the PSC. Orange Genie Accountancy are not an MSP and we have recently written an article on what to look out for.