What do the Chancellor’s IR35 changes mean for consultants?
One of the many surprises in Chancellor, Kwasi Kwarteng’s growth plan speech earlier in September 2022 was the abolition of the IR35 off-payroll rules, which he said he intends to take effect from 6 April 2023.
When does IR35 apply?
By way of background, it’s worth pointing out that IR35 is intended to cover situations where a self-employed contractor is engaged through an intermediate, personal service company (PSC). Typically, the contractor will be the PSC’s sole director. This is a common structure in the IT, pharmaceutical and medical sectors, but these arrangements are found widely throughout the economy.
Keep the champagne on ice
While any tax simplification measures are to be welcomed, this news comes with a serious caveat: it is not the IR35 rules themselves that are going, but rather the relatively recently introduced off-payroll provisions that will be repealed.
The justification for this change is that the government believes that reforms to off-payroll working (introduced in 2017 for the public sector and 2021 for the private sector) have added unnecessary complexity and cost for many businesses and therefore risk damaging the UK’s flexible labour market. See our previous blog: off-payroll mistakes now penalised.
The 2017 and 2021 changes saw responsibility for determining the true employment status of workers engaged through a PSC, as well as the liability for getting this wrong, shift from the PSC to the end-user client. This was costly and challenging to implement and many businesses struggled to ensure compliance. As a result, some consultants were left with no option but to work on the payroll as PAYE employees.
Benefits for end-users
The Chancellor is now planning to reverse this and revert to the position where end-users will no longer be required to establish the employment status of their consultants. The PSC will once again be responsible for compliance and payment of tax – a step that will relieve HR teams from some of the associated bureaucracy when working with contractors. This is particularly good news for clients using large teams of self-employed workers.
While this is all positive news, clients should not jump the gun! They remain subject to the current off-payroll requirements until the new rules go live next year.
While end user clients will hope to be able to get back to managing their staffing overheads and saving employer’s NICs, the risk of scrutiny from HMRC is unlikely to totally disappear. Under the old IR35 regime, HMRC did periodically investigate end-users and we expect this to remain the case after April.
Bad news for consultants?
The quid pro quo of this is the consultant (who is a PSC director) will now have to self-assess whether his/her commercial activities fall within or outside IR35. The IR35 rules are notoriously difficult to apply and the penalties for getting it wrong can be substantial. For most PSCs this is a well-trodden path which brings with it the risk of action against them by HMRC -there are a litany of past and ongoing cases in this space.
However, looking on the positive side, these changes may encourage more clients to use self-employed consultants as the cost/benefit analysis will be more favourable for them.
What should consultants do now?
This development is not the end of the story and does not ameliorate the original issues with the IR35 legislation. The onus will now be on PSCs to determine the employment status of their consultants.
PSCs with genuinely self-employed consultants should be able to robustly defend any action by HMRC but, in advance of this latest change to the regime, self-employed consultants using PSCs should take specialist tax advice to understand what their risk is.
How can we help you?
Nexa’s tax specialist Femi Ogunshakin can answer your questions if you think changes to off-payroll working may affect you or your company and you want to find out more. Do get in touch for a confidential and no obligation chat.