Updated on: Apr 11, 2023
As contractor accountants, IR35 news and updates are one of the biggest issues facing our clients (alongside rising energy bills) and is usually the deciding factor for many contractors when choosing whether to work through their own limited company (often within IR35 circles the company is referred to as “a personal service company”) or some other method of working such as using an Umbrella firm.
We already know that Liz Truss repealed the off-payroll reforms (what joy!) for both public sector organisations and those in the private sector, and that Jeremy Hunt then reversed that decision (immense sadness), and that in the autumn statement delivered on 17 Nov 2022 there was no more news on IR35 or the payroll working rules.
So, with that in mind, here is the latest in IR35 developments to help you keep abreast of the changes.
Impacts of the off-payroll working rules reform in the private and voluntary sectors
The HMRC published a new report, Impacts of the off-payroll working rules reform in the private and voluntary sectors, on 15 Dec 2022. As the title suggests this report aims to assess to the impact on the private sector of operating the IR35 rules. Similar to the May 2018 report (which was prepared when these rules were implemented for the public sector), you might be left thinking that in general, end clients found the private sector off payroll rules relatively easy to navigate, and that the change resulted in a large net overall increase in tax revenue collected.
These reports tend to overlook several facets though and without trying to get too negative, the main points for us are
(a) the report concludes that its not possible to undertake a full cost-benefit analysis of the IR35 reforms which would provide the first meaningful glimpse into the effectiveness of IR35 across the economy as a whole
(b) it does not assess how many contractors have been “made” to stop using their ltd company due to such things as unlawful blanket IR35 assessments and end clients who are just too “scared” to engage limited company contractors
(c) how the changes have impacted the talent pool for skilled temporary workers such as engineers, creatives, IT contractors, and finance professionals as contractors moved to seek permanent employment.
IR35 Assessments by the HMRC
As recently reported by Contractor UK, the HMRC are making changes to how they approach and assess end clients that engage contractor clients working through personal service companies.
It is reported they are now asking more specific questions about the dispute process and also for the outcomes of any disputes (along with the IR35 determinations that were made). The HMRC are also requiring a list of all contractors (name, job title, and date of engagement) that were engaged by the end client.
This is essentially a fact-finding mission by the HMRC to determine if there is any need or benefit in probing deeper into the contractor engagement affairs of the end client. This makes sense and is a good use of the thin resources HMRC have in this area, but if end clients are following due process and engaging contractors smartly, we think this will benefit limited company contractors as end clients establish a safe reputation in the temporary work marketplace, which in turn will enable them to attract a more talented pool of temporary workers.
New CEST Tool
On a separate note, the HMRC are working hard to roll out the next version of their CEST tool. This tool (CEST stands for “Check Employment Status for Tax”) was developed by the HMRC to help contractors and end clients determine the employment status of an engagement.
The tool has been widely criticised in recent years which is understandable when looking at case law surrounding IR35 and how little success the HMRC have had when bringing cases to court.
IR35 is not an easy piece of legislation to navigate. The updated version of this tool promises to be more useful, but we remain sceptical as we have seen before that the HMRC tend to interpret legislation to their own benefit and that they often don’t have “on the ground” experience of actual working practices to develop a tool that benefits industry.
Lessons from implementing IR35 Reforms
The Public Accounts Committee job is to examine the value for money of Government projects, programmes and service delivery. This report published in May 2022 was prepared by House of Commons Committee of Public Accounts (PAC) in relation to Lessons learned from implementing IR35 reforms.
In general, we have found the PAC to be efficient in getting to the crux of matters surrounding IR35. In summary this report they prepared was scathing of the implementation of IR35, and critical of just about every everything the HMRC have done so far. The key takeaways from this report are
(a) HMRC rushed the Off Payroll reforms implementation
(b) they were too dismissive of evidence provided by others where it did not suit their own narrative
(c) that the IR35 dispute process is too difficult
(d) the HMRC are not doing enough to understand the impact of the IR35 reforms, including a cost-benefit analysis and impact of the flexible workforce market changes on the ability of UK firms to attract top talent for project work.
Just quickly, what is IR35 again?
IR35 is a UK tax legislation that aims to prevent tax avoidance by individuals who work as contractors or freelancers and provide services to clients through intermediaries, such as a limited company. The legislation was introduced in April 2000 to address the issue of individuals who are essentially employees of a company, but who work through a limited company or other intermediary in order to receive the tax benefits of being self-employed.
Under IR35, if an individual is found to be working as an employee rather than as a self-employed contractor, the intermediary through which they provide their services (ie their limited company) may be required to pay employment taxes on their behalf. This includes paying National Insurance Contributions (NICs) and income tax. With the off payroll reforms introduced to 2017 (public sector) and 2021 (private sector) the liability for any unpaid taxes falls eventually to the end client who engaged the contractor in the first place.
IR35 can be complex and determining whether or not it applies in a particular situation requires a detailed analysis of the nature of the work being carried out and the relationship between the individual and their client. It is important for individuals and businesses to understand their obligations under IR35 and to ensure that they are paying the correct amount of tax.
When IR35 was introduced in 2000, the tax rules for working through your own limited company were vastly different to how they are now. Slowly over the years with the introduction of things like the dividend tax threshold, and changes in corporation tax, the tax hikes have combined to make working through a limited company a less attractive option than what it once was. There are still significant benefits for skilled temporary workers and those making a flexible lifestyle choice to work remotely, but its not what they once were. With that being said though, we are still hugely in favour of temporary workers using their own limited company as we think it provides significant benefits over being self-employed, and with our tax and accounting support, we know our clients will always be in good hands.