With the IR35 reforms (Off Payroll Rules) to be repealed from 6th April 2023, the surprise and welcome news has raised a number of important questions for contractors.
[Oct 17th – Chancellor Jeremy Hunt has cancelled the Off Payroll repeal described below. So nothing changes!]
Here are answers to 12 frequently asked questions asked by contractors since the Chancellor’s so-called ‘mini’ Budget announcement.
1. Has IR35 been scrapped?
No. It is the 2017/2021 IR35 reforms (aka the Off Payroll working rules) which are set to be repealed.
Importantly, the planned changes need first to be written into the next Finance Bill, which must pass through Parliament before receiving Royal Assent. Only at this stage will the IR35 changes become law.
2. IR35 vs Off Payroll – what’s the difference?
IR35 is a term used to describe the original Intermediaries Legislation, which was introduced in 2000.
The rules are contained within Chapter 8 of the ITEPA 2003.
The original rules made workers responsible for self-certifying their employment status. If deemed to be ‘inside’ IR35, then their business income would be taxed as traditional employment income.
In 2017, new IR35 reforms were created – the Off Payroll rules – which moved the responsibility for determining a worker’s employment status from the worker himself to the client.
These rules were first implemented across the public sector, followed by the private sector in 2021. The Off Payroll rules are contained within Chapter 10 of ITEPA 2003.
Over time the word ‘IR35’ has been used to refer to both pieces of legislation, which can be confusing.
3. What happens to IR35 from April 2023?
From April 2023, the Chapter 10 rules will be removed, and the original Chapter 8 rules (the original ‘IR35’) will once again come into play, with contractors responsible for determining their IR35 status.
4. Why has the Government decided to scrap the IR35 reforms?
The Chancellor perfectly summarised his reasons for making the announcement:
In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.
5. Will I be able to use my limited company again?
If your contract work is caught by the IR35 rules, the benefits associated with working via a limited company are massively reduced.
The Off Payroll rules, by transferring the onus of operating IR35 to end-clients, resulted in many clients blanket banning limited company workers.
Once the ‘original’ IR35 returns in April 2023, and the onus of IR35 is placed upon contractors once again, it is likely that limited company working will be a much more realistic option for contractors.
It may take some time for clients to re-adapt to the original rules. Many have spent a considerable amount of time and money adapting to the Off-Payroll rules.
However, a return to the pre-2017 status quo seems likely – and welcome. If clients want the most skilled contractors to work on their projects, they will have to adapt.
Of course, no-one knows how the return to the ‘old’ rules will work in practice, until the small print has been written.
6. Should clients still assess their contractors’ status?
Yes, the current Chapter 10 Off Payroll rules remain in place until 6th April 2023. New contractors and those with a contract extension should be assessed as normal.
The legal liability for new assessments will only pass to the contractor’s company after this date.
Again, how this handover will work in practice, is unknown at this stage.
7. What happens if my role is currently ‘inside IR35’, but it should be ‘outside’?
If your Status Determination Statement (SDS) shows that your current role is ‘inside’, there may be a ‘hangover effect’ if you self-certify as being ‘outside’ IR35 after April 2023.
How will a contractor explain this change if selected for an HMRC investigation?
This (and other) potential changeover issues are explained well in this Osborne Clarke article.
8. Will you be able to use your current SDS for self-certification post April 2023?
This is a very good question. Will contractors be able to use the SDS created by their current client as proof of being outside IR35?
According to tax experts, Qdos, if the status determination was conducted with the contractor’s input, then this might act as proof of IR35 status. If not, a fresh assessment should be made by the contractor, demonstrating due diligence.
In both cases, contractors should look to reassess their IR35 status ahead of 6th April 2023 and in the event of any material change in circumstances, including but not limited to, the undertaking of a new role.
9.Will umbrella companies disappear?
Umbrella companies have become increasingly popular since the introduction of the off Payroll rules; mainly as a result of clients implementing blanket bans on limited company contractors.
Just as limited company working will become more popular again, conversely the demand for umbrella companies is bound to decrease.
PAYE umbrella companies offer a good solution for many contractors – it remains a ‘hassle free’ way to contract and popular option for first timers, and for short-term contracts.
Above all – you should take care when choosing an umbrella company, as a number of unscrupulous schemes have operated in the marketplace for many years. HMRC will always pursue contractors rather than scheme operators for any unpaid tax. If you need a reminder, read up on the Loan Charge.
10. How will HMRC react to the abolition of the Off Payroll rules?
The tax authorities will have been as surprised as the contracting community by the decision to scrap the Off Payroll rules.
The deterrent effect of the Off Payroll rules resulted in a significant decline in the number of limited company contractors. Will enforcement of the ‘old’ IR35 rules be more forceful and widespread?
HMRC may decide to spend more effort investigating the potential of using the MSC Legislation against both contractors and their accountants.
A vaguely written piece of legislation, which has barely been tested in law, the MSC rules may affect you if your accountant is too ‘involved’ in the running of your limited company.
11. Could the Off Payroll rules be re-introduced in the future?
This is a possibility of course. The Off Payroll rules were introduced to counter apparent non-compliance with the original IR35 rules.
This useful KPMG assessment of the repeal makes this point clearly:
…it is quite possible that the OPW rules could be re-introduced by a future government as they were designed to address HMRC concerns around material PAYE/NIC leakage arising from incorrect employment tax status determination by PSCs/workers, and HMRC’s difficulty in pursuing individual cases due to their limited resources.
12. What should you do to prepare in advance for April 2023?
1. Given the current political environment, nothing is certain yet. Be prepared in advance, but be aware that the repeal won’t happen before a forthcoming Finance Bill becomes law.
2. Make sure you have tax investigation insurance in place for your limited company.
3. Check this, and other leading contractor sites for the latest news in the run-up to April 2023.