The Chancellor’s decision to repeal recent reforms to IR35, or off-payroll rules, is not the end of the story, says NICOLA GRAY
It’s an area of business which has been the subject of much debate for some time and the new Chancellor responded to concerns and confusion around IR35 off-payroll rules by scrapping recent reforms. The move, announced in his mini-budget, was welcomed by many employers and contractors.
But the regulation itself remains in place. So what is IR35, how does it affect individuals and businesses, and why were the reforms introduced and then dropped?
In simple terms, it governs how are you taxed on the income you earn from working if you’re not actually an employee.
We’ve seen many people leaving salaried employment in the past to become a contractor, providing services through their own company.
Essentially, the individual would be doing the same job and the company/end user receiving the same service, but there would no longer be an employee/employer relationship. It becomes a supplier/client relationship.
There were benefits for both – the company receiving the service no longer had normal employer obligations and for the service provider they could pay themselves a salary and draw dividends meaning they paid less tax and NI than they would as an employee.
IR35 was first introduced in 2000 as the UK Government’s first attempt to counter tax avoidance by the provision of personal services through an intermediary company or personal services company (PSC).
Ultimately, if you were caught by IR35 it meant that the individual supplying the service was considered by HMRC not to be a genuine self-employed contractor, but a disguised employee.
The consequence of this was that they should be deemed subject to income tax and NIC as if an employee. Critically, the responsibility for making that determination and paying tax fell on the PSC (so was controlled by the contractor).
In short, HMRC recognised there had been significant non-compliance by PSCs and decided to introduce reforms to tighten management of off-payroll working.
The new rules, introduced in 2017 for the public sector and in 2021 for the larger entities operating in the private sector, had the effect of transferring responsibility for determining whether the individual was a disguised employee or not from the PSC to the client end-user. The client became responsible for deducting and accounting for income tax and NI via payroll. The consequences for failing to do so being serious.
For the individual/supplier, the new rules effectively taxed contractors as employees but they did not become employees for the purpose of enjoying normal employment rights such as sick pay etc. It’s not difficult to see the why individuals providing a service through a PSC found this new system much less attractive.
Nor did the end-user client who faced the burden of making the determination, and demonstrating that they did so. This created a greater administrative burden for the end-user client often mandating changes to their on-boarding policies and ultimately, personnel processing.
In his “mini” Budget statement, the new Chancellor announced that he would scrap the IR35 reforms of 2017 and 2021. That is to say, the obligations to determine the employment status will be placed back on the PSC.
This change was part of a range of policies designed to stimulate growth in the economy and whilst the move has been welcomed by those specialising in the IR35 consultancy sector, there have been calls for the government to establish clarity of how the system will develop and a requirement to produce a robust roadmap for the changes.
At this stage, the government is otherwise occupied in trying to rescue the economy following the impact of its other “growth policies” so we may not see the requested clarity for a while.
In the meantime, and in the absence of further detail, it is important that employers and individuals maintain a close watch on any further announcements and ensure they fully understand the current obligations and responsibilities, which remain until the repeal becomes effective.
It is certainly a complex area to navigate so obtaining some employment law advice would be very good advice indeed.
Nicola Gray is a partner in employment Law at Aberdein Considine
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