Posted on:Insights, U.K. Tax, What’s New on the Blog?
UPDATE: On Monday 17 October, the Chancellor, Jeremy Hunt, announced that the Government was not proceeding with the measures described below. The “IR35” off-payroll working rules remain relatively controversial due to their relative complexity and the administrative burden they create. Many commentators continue to call for both future reform of the rules and further consideration of the employee/self-employed worker distinction which underpins them.
As part of Friday’s mini budget announcements, the Government has decided to repeal the 2017 and 2019/2021 changes to the “IR35” off-payroll working rules, with effect from 6 April 2023.
The “IR35 rules” are statutory rules contained in the UK’s Income Tax (Earnings and Pensions) Act 2003, which owe their name to the HMRC press release in which their introduction was initially proposed. The rules were first introduced with effect from 2000 to target individuals working as contractors through personal services companies, as part of a particular form of perceived tax avoidance whereby they would seek to avoid paying employee income tax and National Insurance contributions (NICs) on their remuneration by instead receiving dividends. Originally, the personal services company (often controlled by the individual) was responsible for determining whether the rules applied (and, if so, the personal services company would be obliged to account for income tax and NICs in the usual way). In 2017, the rules were changed for businesses in the public sector such that the responsibility was shifted to the end-user client for assessing whether the contractor would have been regarded as an employee but for the existence of the intermediary company, and, therefore, if it was necessary to deduct income tax and NICs from payments to the intermediary company. In 2019, the government announced that this approach would be expanded to medium and large private sector companies engaging contractors, and this ultimately came into force in 2021. As many businesses will attest, the regime is complex and the recent changes created a significant administrative burden for those businesses engaging contractors.
Full details of the extent of the repeal are not yet available. However, the “growth plan” (see 3.44, 4.20) refers to repealing the 2017 and 2021 changes, so that businesses (presumably, in both the public and private sectors) will no longer be required to assess the employment status of contractors engaged through intermediary companies, or to withhold income tax or NICs from payments to those companies. Instead, those burdens will pass back to the personal services company, as originally intended. This volte-face will significantly reduce the risk and compliance cost for businesses at the end of the supply chain, and will be welcomed by such businesses (although there may also be an element of frustration at the time and costs incurred in altering systems in order to comply with the previous regime).
It is important to note, however, that the IR35 rules will still apply, albeit with the burden falling on the contractor/personal services company (rather than the end client). Businesses should not simply ignore the risks posed by structures designed to avoid employment taxes. HMRC will continue to monitor arrangements involving a personal services company and, in particular, well-advised businesses which have previously determined that an individual should be treated as an employee may be reluctant to see them treated otherwise. Businesses engaging contractors through intermediaries should be wary of facilitating artificial arrangements for contractors, and should ideally obtain confirmations as to compliance by contractors with IR35 as part of service contracts. Businesses engaging individuals directly, rather than through an intermediary company, will still be required to assess the employment status of those individuals and deduct income tax and NICs where appropriate.
The Treasury is estimating a cost to this change of £6.19 billion up to 2026-27.
For more coverage on Friday’s announcements, please see our update on the mini budget.