The plan to repeal the IR35 tax rules has been scrapped. The new Chancellor, Jeremy Hunt, has confirmed that the planned repeal of the IR35 tax laws brought in last year will not be going ahead. The decision was part of the raft of U-turns made by Hunt as he ditched most of his predecessor’s mini budget.
A reminder. These are the off-payroll working rules designed to stop contractors, usually working through a personal service company, from working as ‘disguised employees’. Since April last year responsibility for making the status determination and deciding whether someone falls inside or outside the rules has rested with the hirer. If IR35 applies, PAYE and NICs must be applied in respect of the fees paid to the PSC.
Tax specialist Penny Simmons has given her views on this to Out-Law and a number of publications have picked up on it, including The Times and People Management. She says the Chancellor’s decision gets a mixed reaction from her clients. On the one hand it means responsibility for compliance and tax will remain with businesses rather than individuals. However, on the other hand businesses have already spent a lot of time and money getting ready for the new rules and scrapping them would have meant spending more time and money reviewing off-payroll engagement processes once again.
IR35 is complicated and it’s contentious. It is generally accepted that the rules don’t work effectively and impose a very high compliance burden on businesses. The complexity point was recognised by former Chancellor, Sajid Javid. In January 2020 he announced a review of the rules before their planned introduction in the private sector in April 2020 – that was the original scheduled date for their introduction, then Covid hit, and the legislation was postponed for a full year eventually coming into force in April last year. In her article Penny says the U-turn on IR35 is ‘an opportunity to undertake a comprehensive review of the IR35 rules’ and to ‘commit to real reform’.
So, what might that mean? Given we have had one review already, why do we need another? Earlier Penny joined me by video-link to discuss this and I put those points to her:
Penny Simmons: “So Joe, that review was about reviewing the new IR35 rules that we've been talking about for a long time now. That review was about reviewing those rules and seeing if the Treasury, if you like, and the Revenue, could iron-out, smooth, problems with those rules before they were implemented. I can't remember the date, but I think it was published in January 2020 and it was completed in February 2020, and then we had COVID, then we had the delay to the new rules being introduced anyway. What I'm advocating for, if you like, is that there's a full-scale, comprehensive review of the IR35 rules, not just about who bears the responsibility for applying them but, actually, the rules themselves and how we go about taxing off-payroll workers, how we go about establishing whether somebody is an employee for tax purposes, or self-employed for tax purposes, because that's one of the major problems with the rules, that businesses, and before businesses it was contractors in 2017, or 2021. What they struggle with is actually establishing, according to the tax test, whether they are an employee for tax purposes, or whether they should be self-employed for tax purposes. So, I'm talking about a comprehensive review.”
Joe Glavina: “Why do you think another review could be different from the previous reviews into employment status?”
Penny Simmons: “What I think is different here is that at the mini budget, at the end of September, we had an admission, if you like, from the previous Chancellor that there was a problem with the IR35 rules, and I don't think we've had such an open admission. I don't think we have had such a public admission that the that the IR35 rules can be problematic for businesses when they seek to apply them when they're trying to apply them, so the difference here is let's springboard off that. We’ve had that admission, we know that they don't work brilliantly, we know that they create compliance burdens for businesses, so let's look at undertaking now a comprehensive review. We don't need to do that super quickly, let’s do that properly, let’s have a detailed review and let’s see if we can get to a point whereby the rules work for businesses and contractors, and don't allow unacceptable tax avoidance. So, it would be a win-win for every party.”
Joe Glavina: “But is it too difficult? How could it be done?”
Penny Simmons: “I don’t think it's too difficult to achieve. I don't think it's necessarily something that can be done quickly. That's why I'm not suggesting that we would see a change in the rules anytime soon, but I do think that there are tax professionals, businesses, industry professionals who are all open and willing to engage with the Treasury, and the Revenue, to really look at these rules and see if we can find a workable solution and I think that is an exercise that can be undertaken. So no, it's not necessarily easy, it’s not necessarily something that can be done super quickly, but it is something that can be done, and it's something that should be done, because we need a tax system that is easier to apply and is effective and doesn't enable tax avoidance. We also need certainty in the law. So, we need a position that that doesn't keep changing either. So, certainty and a workable tax system is what businesses need and we can get there.”
Penny’s Out-Law article covers all of this in more detail, if you are interested. It is called ‘UK IR35 U-turn receives mixed reaction’. We’ve put a link to it in the transcript of this programme.
- Link to Out-Law article: ‘UK IR35 U-turn receives mixed reaction’