The changes to the IR35 employment tax rules introduced in April last year are to be repealed from April next year. That change will shift responsibility for compliance back onto individuals and their personal service companies and away from the engaging businesses. We’ll consider what that switch means for those hirers.
As the FT reports, in his mini-Budget on 23 September, the Chancellor, Kwasi Kwarteng, said that workers, rather than businesses or public authorities, would once again be responsible for determining their employment status. He said it would free up time and money for businesses that engage contractors, and help the government’s growth plan.
He told the Commons: “We can [also] simplify the IR35 rules – and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses. So, as promised by My RHF the Prime Minister, we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”
A reminder. The IR35 rules require that employment taxes be paid by people who provide services to a business through a personal service company (PSC) or other intermediary if that person would otherwise have been regarded as an employee for tax purposes of the engaging business. From 6 April 2021 engaging private sector businesses, rather than the engaged individuals, became liable for determining whether the IR35 rules apply, operating PAYE and paying employers' NICs for contractors falling within the scope of the rules - that change had already happened in the public sector. What is changing is who has responsibility for the status determination – from April next year it will switch back again, away from the engaging business.
That was a big announcement and tax specialist Penny Simmons was quick to comment in her article for Out-Law. She says whist the initial reaction from business is ‘likely to be positive’, at the same time there will also be ‘huge frustration regarding the immense amount of time and money that businesses have spent on ensuring compliance with the rules”. She says, ‘ripping up the rule book won’t necessarily translate into reduced compliance costs in the short term.’
So, let’s hear more about that. Earlier Penny joined me by video-link to discuss the news and I put it to her that, notwithstanding all the hype, nothing is actually changing yet:
Penny Simmons: “No, and that’s a really, really, really key point, Joe. Nothing is changing now. So, when the surprise announcement came out a couple of weeks ago, there were lots of articles coming out sort of saying repeal to IR35 and repeal to IR35. There are two points I'd make to that. First of all, it's not a repeal of IR35. At the moment, what we are expecting, is a repeal of the changes to IR35 that were introduced in April 2021 which put the risk and the responsibility of applying IR35 on businesses rather than the PSC contractors. So, what we're now talking about is a situation whereby responsibility for applying IR35 is going to shift back to the individual contractors themselves from April 2023, but the other thing that's really, really, really key is that nothing is changing now. So, for the time being, and certainly not before April 2023 as far as we know, the responsibility, the legal and tax risks, for applying IR35 still sit with businesses.”
Joe Glavina: “In your article you say businesses have good reason to be frustrated because in recent times they’ve had to completely change the way that they engage with off-payroll workers, which has been costly and time-consuming. Why has that been so costly and time-consuming?
Penny Simmons: “Okay, so the changes were widespread, and there was no one way that a business changed its compliance processes, and its onboarding processes. The way it engaged contractors will have depended on the nature of the business and its contractor population but, ultimately, before these changes to IR35 were introduced, businesses could engage with contractors through personal service companies and in many respects they paid very, very little attention to whether the contractors themselves were applying the IR35 rules correctly. Now, when the rules changed, what the first thing that businesses had to do, and I think we probably talked about this, at some point, Joe, in our numerous programmes on this, was identify their contractor population and their population of contractors who were engaging through personal service companies. They didn't previously, or they certainly wouldn't have felt compelled to previously, have held that information. So that in itself was a process, and an onboarding process, whereby they have to ask the question of not just their HR teams, but often procurement, to identify was this contractor going to want to be paid through a personal service company, i.e. did they want to engage through a personal service company and, therefore, was the business going to have to ask a certain number of questions of that contractor so that they could undertake a status determination and provide the status determination statements and ultimately comply with the IR35 rules. The other area where compliance processes would have shifted quite significantly would have been where the businesses were engaging contractors through personal service companies through agencies first. So, you'd see business, then the agency and then the individual contractor. Now, again, previously either the businesses themselves engaged directly with the contractors, or they engaged with a number of agencies, and what we've seen businesses do over the course of the last couple of years is, if they were going to still engage with contractors through personal service companies, try and route them through agencies to simplify their IR35 compliance processes and, when and where they were already using agencies, often we saw situations whereby businesses either streamlined the number of agencies that they worked with, but also reviewed their terms and conditions with those agencies in order to make sure that both the business was doing what it needs to do, but the agency was also doing what it needed to do from an IR35 perspective. So, whether that was deducting tax, if the business made a determination that a contractor was inside IR35, or simply providing the business with the information that the business needed to make those status determinations. So, there was a whole host of compliance and process changes that were made in order to ensure that a business was complying with the changes to the IR35 rules that were introduced from April 2021.”
Joe Glavina: “The Chancellor says this change will be from April 2023. So is the message to clients, to hirers, change is on the way, yes, but in the meantime carry on as you were?”
Penny Simmons: “Absolutely do not change your processes right now, unless you don't have any IR35 compliance processes in which case, do consider quite strongly whether you need them, because from this point in time until April 2023, unless we hear otherwise, the IR35 rules as they currently stand whereby a business is responsible for applying IR35 and deducting tax if they are within IR35 when they engage a contractor through personal service companies, those roles are not changing at the moment and the risk sits with the business. So, it is for the business to make those status determinations and work out whether their contractors engaged through personal service companies fall inside or outside of the IR35 rules. I do think that businesses need to be alert to the fact, if they're not already, that the rules are expected to change from April 2023. I do think that businesses very much need to watch this space because if, as will be the case with many, many businesses that engage contractors through personal service companies, if they change their onboarding processes, and their agreements, to deal with the changes to IR35 then their onboarding processes, and those agreements, are likely to need changing again, but I think at the moment we need to watch and wait and see exactly what the changes are going to look like before businesses, if you like, have a knee-jerk reaction to changing agreements with agencies. But it is something that they're going to need to be alive to the fact that they are going to need to do, and they are going to need to start making those changes, probably after Christmas.”
That announcement by the Chancellor that the IR35 rules will be repealed is a huge story and we will be returning to it next week. Meanwhile, Penny has written about this in some detail in her article ‘UK IR35 employment tax compliance changes to be repealed’. That is available now from the Out-Law website and we have put a link to it in the transcript of this programme.