Off-payroll rules (IR35) – As you were?

United Kingdom

The Chancellor positioned the Government’s mini-budget last week as a new approach for a new era, focused on growth. In the Chancellor’s speech, the off-payroll rules (introduced in 2017 for the public sector and in 2021 for the private sector) were described as having added unnecessary complexity and cost for many businesses. As a result, the Government will repeal the off-payroll rules from 6 April 2023 as part of its drive to simplify the UK tax regime. 

According to the Government’s Growth Plan 2022, the repeal will (for businesses that engage contractors) free up time and money for other priorities while minimising the risk that genuinely self-employed workers are impacted by the off-payroll rules. The repeal of the off-payroll rules (sometimes referred to as IR35), represents a significant change in direction from the Government, which previously introduced the rules inspired by the finding that only 10% of personal service companies (PSCs) were correctly accounting for tax.

The repeal of the off-payroll rules means a return to the position pre-2017: a PSC, when engaged to provide a service by any third party in the public or private sector, will once again be responsible for determining its own worker’s status for tax purposes and accounting for any tax liabilities. No longer will organisations higher up the supply chain be saddled with these burdens. 

Many businesses will be pleased at the repeal. Organisations wanting to onboard limited company contractors at short notice were often completely wrongfooted by the administrative work needed to carry out status determination assessments, update longstanding contractor agreements, and the requirement to account for tax and National Insurance in certain cases. The drive to steer away from the off-payroll rules caused a number of businesses to make use of agencies which added to the cost of services and meant having to contend with agency worker rights which could otherwise have been avoided.

Only time will tell if the return to the old rules will lead to a rapid rise in the use of PSCs in the private and public sector. There are clear benefits to the repeal for businesses that engage contractors. However, some may be put off by concerns of the reputational impact of a partial return to the PSC staffing model. Others may be worried by the spectre of potential criminal liability for facilitating tax evasion under the Criminal Finances Act 2017, which might arise for example where a PSC (whose worker was previously deemed by the end user to be an employee under a status determination) starts treating their worker from 6 April 2023 as being self-employed for tax purposes (with the end user’s knowledge) despite the fact that none of the underlying working arrangements have materially changed.

Further guidance is expected from HMRC in due course. In advance of April 2023, client organisations and agencies will, once again, want to review the terms of their PSC arrangements and supplier agreements, to make sure that they are primed for the new era. Once that new era begins, it may not be time to completely throw out copies of the old-style contracts – the Chancellor has qualified his reform plans by emphasising that the Government will keep compliance closely under review.