What is IR35?
IR35 is a UK tax law surrounding payroll working rules.
It was designed to close a loophole in the tax system where workers could potentially use the setup of a limited company structure in order to pay less tax. This has been in place for over 20 years!
In April 2017, changes were made which meant that all public sector clients became responsible for deciding their workers’ employment status. In April 2021 (following a delay because of COVID), the private followed suit.
This meant the liability and financial risks were transferred to the fee-paying party and its supply chain.
UPDATE (Oct 2022): Chancellor Jeremy Hunt has now scrapped the IR35 reform repeal that was planned by his predecessor Kwasi Kwarteng.
What’s been announced
On September 23rd 2022, Chancellor Kwasi Kwarteng announced that from April 2023, the IR35 regulations will revert back to how they were before the 2017/2021 reform.
This means that contractors providing their services via an intermediary (outside IR35 contractors) will once again be responsible for determining their employment status.
Contractors will therefore need to make sure that they are paying the correct amount of tax and NICs.
This will apply to both public and private sector workers.
How will this impact contractors and employers?
It is important to remember that although Kwarteng has repealed these reforms and it is very likely that they will revert back to pre-2017/2021 regulations - it is not set in stone just yet.
While it is in the government’s Growth Plan the prime minister and Kwarteng will continue to keep the compliance under close review.
Additionally, if we have a new government before this legislation is repealed, it could change again. After the year the UK has had, anything is possible!
Working as an outside IR35 contractor will undoubtedly become much more appealing to many workers. Availability of outside IR35 roles will almost certainly increase as the liability risk to employers is reduced.
IR35 will continue to be monitored on an individual basis so make sure you are prepared for an investigation.
Additionally, genuinely self-employed workers have less risk of being impacted by the underlying off-payroll rules.
Any contractors who are currently inside IR35 but would like to become outside IR35 from April 2023 will need to be very careful in how they do this. As your employer has already classed you as inside IR35, it could be difficult to defend the switch if HMRC investigates. Starting a new role with a new company that has been properly determined and operating outside IR35 will likely be your safest option to manage this.
For contractors who would like to restart their limited company, make sure to consider HMRC’s anti-avoidance rule (TAAR). If you reopen a company in the same trade or activity it is very likely that TAAR will apply and any funds previously withdrawn as capital will need to be treated as income with additional tax to pay.
Blanket bans against limited companies will likely be removed from April 2023. This is especially true for sectors where talent is in high demand and difficult to find. In industries where the balance of power is weighted towards the end client, blanket bans may remain for a little while longer.
For many contractors, this will mean that you no longer need to use an umbrella company from April 2023. In the meantime, you could consider increasing your pension payments as a tax-efficient way to mitigate the cost of being self-employed via an umbrella company.
When leaving your umbrella company make sure you aren’t losing out on anything that you’re owed. Check your pay slips and make sure you have received all your holiday pay. If you haven’t received everything you’re owed, either take the time as a holiday or ask to be paid in lieu before leaving the company.
For many employers, the April 2021 updates caused confusion and stress.
If you employ outside IR35 contractors you will likely have invested time and money into updating your policies and procedures in line with the 2021 reform. This U-turn will likely be frustrating for you, even if it will become a simpler process overall.
These policies haven’t gone to waste though and will still be needed until April 2023. If a contractor is investigated for a period of work between now and April 2023, the liability will still be the responsibility of the end client. The burden of status determination should therefore continue to be taken seriously until this time.
If you have labeled a worker as inside IR35 and they want to operate as outside IR35 post-April 2023, this could have an impact on you if they are investigated by HMRC. The Criminal Finances Act 2017 means that companies need to take reasonable steps to prevent tax evasion within their supply chains. By allowing a contractor who you determined as inside IR35 to work as outside IR35 in the same role, HMRC may have means to think you have failed to prevent the facilitation of tax evasion.
Some news outlets have predicted that employers will be less likely to take on new contractors before April 2023. By taking a hiring pause you could reduce your tax risk.
However, if you have urgent projects that cannot wait – please get in touch. We are able to support your needs.
How will this impact the market?
This is a completely unknown territory!
Some employers may lift their blanket bans but some may not think it’s worth the hassle even now.
The market for outside IR35 will likely increase hugely as the risk is reduced for employers.
There will undoubtedly be a wider impact on 3rd party organisations such as umbrella companies and recruitment agencies who will need to adapt to the new needs of their clients.
If you have any questions, please get in touch. We will continue to keep you updated as announcements progress.
Kay Fadden, Recruitment Specialist - Microsoft D365 F&O / SCM