The changes to the IR35 employment tax rules introduced in April last year will be repealed from April next year. That was one of the many big announcements by the Chancellor in his min Budget on 23 September. However, IR35 itself is not being repealed, nor are any of the corporate criminal tax offences that apply in this context. We’ll come onto those shortly.
A reminder. In his fiscal statement on 23 September in a measure billed as ‘freeing up time and money for businesses that engage contractors’, the Chancellor, Kwasi Kwarteng, said that workers, rather than businesses or public authorities, would once again be responsible for determining their employment status. He is shifting responsibility for IR35 compliance back to individuals and their personal and away from the engaging businesses, reversing the changes introduced in the public sector in 2017 and in the private sector in April last year.
Last week tax specialist Penny Simmons talked to this programme about the impact of this on hirers. She said while the initial reaction from business is likely to be positive, there will also be huge frustration given the huge amount of time and money that businesses have spent in the last two or three years ensuring compliance with the current rules. She said repealing the rules doesn’t mean that that’s the end of the story – businesses will now have to spend time and money once again reviewing their arrangements for engaging off-payroll workers and their agreements with both contractors and labour supply agencies. So, ripping up the rule book won’t necessarily translate into reduced compliance costs in the short term.
Penny also makes the point that, aside from IR35, businesses will remain exposed to tax risks by virtue of other tax rules such as the corporate criminal tax offences. The corporate criminal tax offences, introduced in 2017, make a business vicariously liable for the criminal acts of its employees and other persons 'associated' with it, even if the senior management of the business was not involved or aware of what was going on. So, ultimately, businesses could be exposed to criminal liability if they pay contractors off-payroll when they know that they should be taxed as employees.
So what exactly is that corporate criminal liability? Penny Simmons again:
Penny Simmons: “They are two criminal offences whereby a company can be criminally liable if one of its employees, or somebody providing services in its name, facilitates tax evasion. So, you're looking for a couple of things here. So for these offences to apply there would have to be tax evasion, and we’re not talking about the business evading its own taxes, we're talking about somebody evading their taxes. So in this case, we would be talking about an individual contractor evading their own taxes, so not paying tax when they know that they have a tax liability and they dishonestly choose not to pay that tax. Then there’s criminal facilitation - so somebody working for the business, an employee, or simply providing services. So, we could be talking about agencies and payroll providers, so somebody doing something in the business’s name that helps that individual, so helps that contractor in this case, evade tax, and then the company itself would be strictly liable if both of those things happened. So, tax evasion, criminal facilitation, if the business doesn't have procedures in place to prevent that facilitation, then they would be strictly liable and exposed to the corporate criminal tax evasion offences of failing to prevent tax evasion. There is a defence whereby the business can prove that, notwithstanding tax evasion has happened and somebody has criminally facilitated that tax evasion, they had reasonable procedures in place, to prevent that facilitation happening and that is where we would expect to see a business having robust onboarding procedures and compliance procedures to ensure that somebody working for the business doesn't help a contractor evade off-payroll taxes.”
Joe Glavina: “Those criminal tax offence have been around for some time, Penny. What happens if a business is prosecuted? The consequences?”
Penny Simmons: “Yes, the corporate criminal tax evasion offences have been around since 2017. In terms of what happens if a business is successfully prosecuted under the offences, well two things would happen. One is that they would be subject to an unlimited fine, and two, they would have a criminal record. That may bar them from bidding for certain public sector contracts, but it is that reputational risk that sits with having a criminal record, a criminal prosecution, but even if there isn't ultimately a successful prosecution, that investigation, that criminal investigation, would expose the business to huge reputational risks that a business wouldn't want to ignore, particularly large businesses, when the Revenue is undertaking its business risk review. So HM Revenue and Customs undertakes business risk reviews to establish the tax risk rating of a business, and one of the things the Revenue will look at is how robust are the business's prevention procedures in relation to the corporate criminal tax evasion offences? So, what procedures does the business have in place to prevent one of its employees, or someone working for it, from facilitating tax evasion? Now, if the business can't show that it's got robust procedures then it is vulnerable to having a higher risk rating from the Revenue and that higher risk rating also comes with reputational damage, not only in relation to the business's relationship with the Revenue itself, but also if the press were to review and have a look at the risk ratings of businesses, and were to look at businesses that don't have a low tax risk rating from the Revenue, and consider why they don't have that low risk tax rating.”
Joe Glavina: “There was a lot in that mini-Budget and a few things have been ditched, notably the 45p tax cut, and there’s a lot of speculation around whether rebel MPs will force the government to drop more. The headlines all say these IR35 changes will be reversed in April. How likely is that?”
Penny Simmons: “Joe, that is a great question. Look, prior to the mini, or not so mini, budget we had expected the Chancellor to announce a review of the IR35 rules. He didn't do that. He said that there would be a repeal of the changes. We don't know what that repeal looks like and I think that's a really important point to note. We don't have any draft legislation, we don't have any documentation at the moment to say what that what that repeal looks like and whether there any elements of the new rules that were introduced from April 2021 in terms of compliance and status determinations, whether any of those will be retained. Do I think the changes will be introduced? At the moment, there's nothing to suggest that they won't. Yes, we have seen the u-turn on the 45% income tax rate, so it's not outside the realms of possibility that we will see a u-turn. It’s also not outside the realms of possibility that the repeal will be converted into some kind of comprehensive review, or that the repeal of the changes could be delayed beyond April to allow time for new legislation to be drafted. I think at the moment, we just don't know and your guess is probably as good as mine. What I think we will know is, come the fiscal event where we will see some documents from the OBR and also from the Treasury and the Revenue which, I think, we're now expecting to have that event held at the end of this month, so at the end of October. So I think we should have a better idea by the end of October what the repeal is going to look like and whether it will actually be going ahead from April 2023.”
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. There’s also last week’s programme on this to watch where she talks about the impact of the changes on hirers. That’s ‘IR35 compliance rules 'not changing yet', warns tax lawyer. We’ve put a link to both in the transcript of this programme.
- Link to HRNews programme: ‘IR35 compliance rules 'not changing yet'
- Link to Out-Law article: ‘UK IR35 employment tax compliance changes to be repealed’