The Chancellor’s 23 September Growth Plan announcements included a statement that the extensions to IR35 (the off-payroll working rules), legislated in 2017 and 2021, would be repealed
Since 6 April 2021, all medium and large-sized private sector organisations are now responsible for deciding if the IR35 rules apply to their contractors. The off-payroll working rules (IR35) were similarly reformed for public sector organisations in 2017.
Note that IR35 is not being scrapped. First announced in an ‘Inland Revenue’ press release 35 on 9 March 1999 (and known as IR35 ever since), it was intended to clamp down on the growing use of one person limited companies (personal service companies, or PSCs) to allow workers, who would otherwise be employees of the end client, to take advantage of tax-efficient payments, such as dividends, via an intermediary.
And, the current rules will still apply for services provided before 6 April 2023, even where the payment is made on or after 6 April 2023.
From 6 April 2023, workers providing their services via an intermediary will regain sole responsibility for determining their employment status and paying the appropriate amount of tax and National Insurance Contributions (NICs).
The Government said it was taking the action because the previous reforms had added unnecessary complexity and cost for many businesses. However, the announcement came as a surprise to many contractors (workers) and organisations using contractors (end clients) who have been struggling with the legislation over the past five years – not least the many Central Government departments, who in 2020/21 owed, or were expected to owe, HMRC £263m in back taxes due to not fully understanding/implementing the rules (please see our earlier Bulletin).
Organisations using contractors may welcome the development, because it shifts the obligation to assess status and potential liability to account for employment income tax and NICs back to the worker’s intermediary. End clients will no longer have to bear the risk of incurring tax liabilities if status has incorrectly been assessed as self-employed.
However, it’s important for workers not to assume they will be able to deem all of their assignments as being outside of IR35, without fully understanding IR35 and ensuring that every contract is thoroughly assessed. Specialist advice is likely to be required to ensure compliance with the rules and to reduce any risk of an HMRC investigation in the future.
As a reminder, the four key factors for a worker to prove that they are genuinely self-employed, and not caught by IR35 are:
- No control – there must be no, or absolutely minimal, control over the worker.
- No mutuality of obligations – to be self-employed, the worker has to show that they can turn work down. If there is an obligation for the end client to give work to the worker, and he or she has to accept it, there would be mutuality of obligations, and he or she would be an employee.
- Substitute – ideally the worker would have a substitute, at the same technical level as him or her, and have used that substitute. The worker, or their personal services company, must have chosen, engaged and paid the substitute.
- Insurance – the worker, or their personal services company, must ideally have paid public liability insurance or other relevant insurance relating to their work.
To be self-employed the worker has to win on both of the first two: no control; and no mutuality of obligations.
For more information on IR35, please see our earlier Bulletin.
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