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Repeal of the IR35 “Off-Payroll Rules”

In the recent “mini-budget”  it was announced that the IR35 reforms introduced in 2017 and 2021,  referred to as the “Off-Payroll Rules,”  will be repealed with effect from 6 April 2023.    

This means that End Users of freelancers providing their services through their own personal service companies, “Limited Company Contractors”, will no longer have to 

1) decide whether their engagement falls within the remit of these rules, 

2) carry out any employment status check in respect of them as if the rules did apply, which included notifying the Limited Company Contractor of the results of their deliberations (dealing with any appeal then arising).

Applying these rules has been a costly, time consuming burden on businesses.  The rules were also complex and uncertain, both in respect of whether they ought to apply at all and then in determining employment status.  Disputes inevitably arose between the Limited Company Contractors, Intermediaries, End Users and HMRC in respect of these matters.

In addition, given the uncertainty of the rules and potential tax liabilities for not applying them correctly, many End Users took a very conservative approach to borderline cases (sometimes adopting a blanket ban on engaging Limited Company Contractors at all) this caused a significant reduction in the engagement of Limited Company Contractors and the labour market flexibility using them provided.

When the repeal of the Off-Payroll Rules take effect we will essentially be back to where we were before they existed, with Limited Company Contractors self-determining their employment status under the IR35 rules.

This is welcomed by End Users and intermediaries as there will no longer be the tax risks, administrative burden and disputes arising from the Off-Payroll Rules. For these reasons they are also more likely to engage Limited Company Contractors wishing to work as such, on a flexible basis.  Limited Company Contractors will also benefit from a reduced administrative burden, only having to deal with HMRC in respect of employment status issues.

Caveats

However, there are a number of caveats that businesses should be aware of.  

Firstly, the off-Payroll rules will still have effect until April 2023.  Secondly, there are some problems which may arise thereafter.  To begin with HMRC have given no indication that the results of employment status tests carried out under the Off-Payroll rules will be disregarded in future. 

This means that where Limited Company Contractors were deemed to be employees by End Users under the Off-Payroll Rules, they may still be regarded as such by HMRC.

This represents a potential risk not only for the Limited Company Contractor who seek to self-declare as self-employed in respect of engagements where they been deemed to have worked as employees under the Off-Payroll rules, but for those who engage them as Limited Company Contractors in respect of such engagements.

Criminal Offence

If it was evidently the case that the Limited Company Contractor was correctly deemed to be an employee and working arrangement haven’t changed then not only will the Limited Company Contractor have tax liability under the IR35 legislation, End Users and intermediaries involved in engaging the Limited Company Contractor in these circumstances might be argued to be failing to take reasonable steps to prevent tax evasion in their supply chain.   This is a criminal offence under the Criminal Finances Act 2017. In addition, where it is evident that the Limited Company Contractors ought to be taxed as an employee, but they are nonetheless engaged by the End User/intermediary as Limited Company Contractor to avoid paying employer’s NI,  there is then the risk of them having committed the criminal offence of conspiring to cheat/defraud HMRC.

It is also possible that HMRC, to offset the reduction in tax revenue that the repeal of the Off-Payroll will represent, may be more aggressive in relying on other powers available to it to tax limited company contractor/intermediary company arrangements, including under the Managed Service Companies legislation (where the use of specialist services to operate their Limited Company Contractors can give rise to income tax and NI liabilities for contractors and End Users,) or under agencies tax legislation, where those providing Limited Company Contractors to work “under the supervisions, direction and control” of the End User, are liable for income tax and NI.

Next Steps

Businesses should continue to apply the Off-Payroll Rules until 6 April 2023.  Businesses should then be particularly careful in respect of engaging Limited Company Contractors who has previously been deemed to be employed under these rules, being mindful that artificial arrangements aimed at limiting tax liabilities, and a failure to take reasonable steps to prevent tax evasion, may give rise to criminal liability. 

To limit such risks, not only should business keep under review the use of Limited Company Contractorsin their supply chain but should ensure contract documentation for the engagement of Limited Company Contractors should be properly drafted, being consistent with their engagement as independent contractors and not working under the direction and control of clients.

Posted on 6 October, 2022 by Ortolan

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