IR35 is tax legislation that aims to prevent tax avoidance by ensuring that any limited company contractor working in the same way as a permanent employee is taxed as such. In other words, they’re paying the appropriate Income Tax and National Insurance Contributions (NICs).
It’s key to stay updated with changes to IR35. After all, there were off-payroll reforms in 2017 and 2021, and we could see further changes in the future too. Here, we outline what these reforms were, the impact they’ve had, and how parties in the supply chain can effectively comply with them.
What’s new with IR35?
Since IR35 was introduced in 2000, there have been two big changes: one in 2017, and one in 2021. But to answer this question more fully, we have to look at why these changes matter – as well as the 2023 plans that almost came to pass and those on the horizon.
What were the changes in 2017 and 2021?
The off-payroll reforms – also known as the off-payroll working rules – first occurred in 2017. This placed the responsibility for determining an engagement’s status with end clients in the public sector, rather than the worker as it had been since 2000.
These reforms were later introduced in the private sector in 2021. However, they had an exception: end clients who qualify for the small business exemption (‘Small Businesses’ as defined by s382 of the Companies Act 2006) or those based wholly overseas would be excluded, meaning contractors retain responsibility.
The off-payroll rules also introduced the role of the ‘fee-payer’. This is the business that sits directly above the contractor’s limited company and directly pays the worker. It can be the end client if it’s a direct engagement or, for example, it could be a recruitment agency who sits directly above the contractor’s limited company in the supply chain. The fee-payer is responsible for making sure relevant taxes are deducted from the worker’s pay. This includes Income Tax, NICs, and the apprenticeship levy.
Why do the reforms matter to contractors, businesses, and recruitment agencies?
These changes impact all parties in the supply chain. Everyone should know who’s determining employment status for tax purposes so that the client or contractor can take effective action.
While recruitment agencies aren’t significantly affected, the changes still matter. They could be the fee-payer, or they might need to pass on the Status Determination Statement (SDS) or inform the worker who’s determining IR35 status.
What were the changes in 2022?
In the 2022 mini-Budget, the government announced that the off-payroll working rules would be repealed from 6th April 2023. This would have meant that the worker became the party in the contractual chain responsible for determining employment status for tax purposes again in all instances.
However, this never happened. It was reversed less than a month later.
What were the changes in 2023?
There were no changes to the off-payroll working rules in 2023. The government did a quick U-turn on the decision to repeal the off-payroll working rules in 2022.
That said, there was a consultation around HMRC being able to account for taxes that have already been paid by a worker when calculating their PAYE liability due by the fee-payer where the off-payroll rules weren’t applied correctly. This will be a good thing for clients and recruiters as it should reduce tax liability. And it looks likely that it’s going ahead, with this article confirming that the ‘set-off’ mechanism may now be introduced before 6th April 2024 in specific circumstances.
How the changes affect contractors
What does the contractor need to do?
Unless the end client is a small business or based wholly overseas, the contractor is no longer responsible for determining employment status for tax purposes. They should check with the end client or recruitment agency which party will decide the status of their engagement. If it’s the worker, then they’ll need to assess their engagement’s status just like they did before the reforms.
What are the tax implications?
If an engagement is found to be ‘inside IR35’, then the worker would be classed as an employee for tax purposes. This means Income Tax and National Insurance Contributions (NICs) will be deducted from their gross pay. Workers can still use their own intermediaries – usually Personal Service Companies (PSCs) – for ‘inside IR35’ engagements, they just won’t be as tax-efficient.
If the engagement is ‘outside IR35’, then the worker will receive tax benefits through their Personal Service Company.
How the changes affect businesses
What do end clients need to do?
End clients bare responsibility for the status determination made before being obligated to send on an SDS which states the decision on status and the rationale behind it. This is given to the worker, and also to the recruitment agency (if there’s one in the supply chain).
How have the changes impacted the use of contractors?
Some businesses have found that it has not been as straightforward to use contractors due to the off-payroll working rules. This has meant a reduction in the number engaged. For those end clients that have continued to engage contractors, some have had to increase workers’ pay. This is in a bid to make up for the money lost by being taxed as an employee for tax purposes.
Impact of the 2017 and 2021 changes
What has been the impact of the public sector reforms?
HMRC has questioned several public sector organisations on how they’re assessing IR35 status. Non-compliance with the off-payroll rules has resulted in those organisations receiving a tax bill from HMRC – like UKRI and NHS Digital. Bills for the sector are in excess of £300 million so far.
The Department for Work and Pensions (DWP) was left with a staggering tax bill of £87.9m whilst NHS Digital’s bill was £4.3 million – they used HMRC’s Check Employment Status For Tax (CEST) tool, which gave an ‘outside IR35’ status determination that was later challenged by HMRC themselves. But of course, this is wooden money going from one department to another within the publics pot.
It’s important to note here that no public sector bodies have contested HMRC’s challenge and therefore haven’t made their way through the tribunal system and we are yet to see a public sector organisation challenge HMRC’s stance. The private sector will without doubt be a different story where its unlikely that HMRC’s questions will remain unchallenged.
What has been the impact of the private sector reforms?
From a status perspective, we’re waiting to see the impact of these on end clients. There have been compliance checks, which have affected clients all over the UK including a handful of our own clients. We discussed these in a recent webinar, where we outlined what a letter opening up a compliance check could look like and lead to, as well as actions for end clients to take.
As the private sector doesn’t have a state-funded piggy bank, we expect they’ll be much more resilient to any challenges HMRC presents. These compliance checks may result in some cases going to through the tribunal system in the 12-24 months after should HMRC not be satisfied businesses are navigating the reforms compliantly.
How to adapt to the off-payroll working rules
Contractors and recruitment agencies don’t have much to do – the onus rests in the majority of cases on the end client’s company. However, all parties should get to grips with what the off-payroll working rules are and their impact. We provide a tool to help determine IR35 status, but it helps to have an understanding of the legislation too. We’ve compiled a list of resources below:
- Information about HMRC’s compliance checks and how end clients can prepare their organisation
- FAQs from our webinar, answering key questions you may have
- Blog on what IR35 is
- Blog outlining IR35 and the off-payroll rules
- Blog on inside vs. outside IR35
- Kingsbridge Annual Whitepaper 2023
What are the practical steps for contractors?
As the majority of workers no longer have to assess their engagement’s IR35 status, their only obligation is to ask the client or recruitment agency to confirm who the responsibility lies with. If it’s the contractor, then they can find guidance on checking employment status for tax purposes here.
What should businesses have on their compliance checklist?
End clients need to review their supply chain and compliance practices, and make sure a record is kept for all decisions, processes and policies. The checklist is as follows:
1. Assess the status of an engagement where necessary, taking reasonable care
2. Issue an SDS to the worker and the next party in the supply chain
3. Make sure there’s a process in place in case of an IR35 status dispute
What do recruiters need to do?
Recruiters don’t have much of a role. They’ll be responsible for passing on the SDS to the next party in the chain. And, if they’re the fee-payer, they’ll need to deduct and account for the tax owed.
IR35 changes and the future
Will the small company exemption be removed?
As for the future of IR35 and the off-payroll working rules, along with the consultation, there’s widespread speculation surrounding the potential removal of the small business exemption. This is because the same rules are being applied to different groups of people depending on size, which has resulted in some working around the rules. For example:
- New contracted-out service providers are benefiting from being a small business and providing service or product rather than the labour of a recruitment agency
- Businesses are starting a new company for two years so that they can be classed as a small company
- Contractors are starting their own consultancy, instead of just being a contractor
We therefore expect that the exemption will be removed at some stage in the future, or the rules will simply encompass small, medium, and large private sector businesses.
Keep ahead of changes with Kingsbridge
IR35 is a minefield – with the 2017 and 2021 off-payroll working rules impacting the entire contracting industry, and repercussions still very much being felt. It’s key that every party stays up to date with the legislation and can manage its effects, regardless of who determines status.
How can you stay informed and prepared?
You can stay ahead of the curve through our blog – we regularly update it with information on legislative changes and our own expertise. You can also get in touch with our IR35 specialists if you need further support.