IR35 reversal – a dash back to the contractor/PSC model?
27th September, 2022
IR35 was introduced to crack down on a particular form of perceived tax avoidance whereby contract workers would seek to avoid paying employee income tax and national insurance contributions
Services would be supplied through an intermediary, most commonly a personal service company (PSC). In the “mini-Budget” on 23 September 2022, the Chancellor announced that the off-payroll worker rules passed in 2017 and 2021 are going to be reversed from 6 April 2023. The announcement was generally met with widespread support by users and suppliers of contract workers, who view this as a more tax-efficient way of hiring and supplying such workers through a PSC. There are however some precedents which have been created during the short period of IR35 which are going to take some time and effort for contractors and end users to detangle.
What are the current IR35 rules?
The ‘end client’ is required to formally assess whether the contract worker would be an employee had they been directly engaged, by conducting a ‘status determination’ and if so, the ‘end client’ is required to include the contract worker on their payroll, and account for income tax and employee and employer NIC’s.
What are the proposed IR35 rules as of 6 April 2023?
A contractor providing their services via an intermediary will be responsible for determining their own employment status and paying the appropriate amount of tax and NIC’s. This is not a repeal of IR35 but a return to the IR35 position prior to the off-payroll worker rules passed in 2017 and 2021.
How does the reversal benefit the contractor?
The contractor can supply their services in a more tax-efficient manner by allowing them to minimise the amount of employee income tax and employee NIC’s, and thereby increase take-home pay, after conducting their own assessment of the risk of their employment status for tax purposes.
How does this reversal benefit the ‘end user’?
It passes the administrative burden and legal risk of whether an individual is really self-employed or not, back onto the contractor. This means that the ‘end user’ is not exposed to PAYE or NIC’s if the employment status assessment by the individual is incorrect.
It also means that the ‘end user’ is no longer required to keep the individual on their own payroll and will not have to account for employer NIC’s and the Apprenticeship Levy.
The administrative burden of carrying out a status determination and financial risk of getting it wrong, has led many ‘end users’ to change their operating models, for instance by banning the use of contractors being supplied through PSC’s, substantially reducing the take on of contract workers via PSC’s and taking an overly cautious approach to status determinations.
Will there be a dash back to the contractor/PSC model?
There is likely to be a major push by contractors to be taken off the payroll as of 6 April 2023 and revert back to contractors having the responsibility of making an assessment as to the employment status for tax purposes. Equally there is likely to be support from the ‘end user’ to change their operating model and shift the administrative cost and risk back on to the contractor and to be more flexible in contracting with individuals with key skills. In addition, companies will want to ensure that they retain key talent within their business as opposed to losing talent to competitors who allow contractors to operate via PSC’s. However there are a number of reasons why this may not be a straight forward switch back to the previous operating model.
- If prior to 6 April 2023 the ‘end user’ has previously determined that the role being performed by the contractor should be on their payroll for tax purposes, essentially inside IR35, then HMRC are likely to take such a determination into account, should they take issue with a contractor determining that they are self-employed as of 6 April 2023, particularly where the role or services provided are the same or similar. The contractor will need to be able to clearly explain why the end user’s earlier status determination should not be preferred to their own status determination.
- The Criminal Finance Act 2017 requires companies to take reasonable steps to prevent the facilitation of tax evasion in their supply chains. In addition, section 1 of the Criminal Law Act 1997 creates a statutory offence of conspiring to cheat the public revenue. If pre 6 April 2023 the ‘end user’ had determined the role as being inside IR35, and the contractor is performing the same or similar role post 6 April 2023, but the contractor has determined the role as being outside IR35, is the ‘end user’ exposing itself to having failed to take reasonable steps to prevent the facilitation of tax evasion or conspiring to cheat HMRC?
What should you be doing?
We need to wait for the details around how the off-payroll rules will be detangled and administered as of 6 April 2023, but at a strategic level, companies need to start planning now, taking time to rethink its operating model, given the inevitable dash by contractors to revert to operating via a PSC and self-determine employment status for tax purposes.
If you have any questions surrounding this change in legislation, and how this will impact your organisation specifically, please contact one of our expert Employment Lawyers.