IR35 rules

An HMRC report on how IR35 reforms have impacted contractors has attracted criticism.

Read on to find out what the report said about IR35 and why it’s been accused of being ‘wide of the mark’.

HMRC report – what were the key findings?

Published in December, the HMRC report was based on a telephone survey of 353 businesses with 39 follow-up interviews.

Here are some of the key findings:

• 130,000 workers are likely to have been affected by off-payroll reforms in April 2021
• IR35 reform generated an additional £1.8 billion in tax revenue between October 2019 and March 2022
• businesses employing contractors incurred an overall one-off cost of between £90 million and £230 million to implement the reforms
• they spent a further £150 million to £370 million between April 2021 and April 2022
• the number of workers affected by IR35 reform makes up 2.5 per cent of the total self-employed workforce

What happened to contractors affected by IR35 reform?

According to HMRC estimates, the majority of contractors impacted by off-payroll working reform have become an employee of a business that isn’t their own freelance company.

It suggests that approximately three per cent have continued to work for their own freelance company having been deemed ‘employed for tax purposes’ by the business they work for.

Of those who have become an employee of another organisation:

• 65 per cent have moved to organisations which aren’t agencies or umbrella companies (which could include becoming an employee of a client)
• 20 per cent have moved to an umbrella company
• 15 per cent have moved to an agency

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Do businesses still work with contractors post-IR35 reform?

HMRC’s research suggests that 41 per cent of organisations surveyed now work with fewer off-payroll contractors than they did in March 2020.

Meanwhile, 35 per cent said they hired the same number of off-payroll workers and 23 per cent said they’ve taken on more since IR35 reform.

The survey also found that 47 per cent of businesses worked with the same number of off-payroll contractors in September 2021 than in March 2020.

Five reasons why the HMRC report has been criticised

A number of off-payroll working experts and commentators have criticised the government’s report, according to publications like Contractor UK and The Register.

One commentator said the report was ‘wide of the mark’, while another said the findings should be taken with ‘a pinch of salt’.

Here are five reasons why it’s attracted a negative response:

1 . Could contractors be paying unnecessary taxes?

Many of the 130,000 workers who have moved to payroll since the reforms may have incorrectly been categorised as inside IR35, meaning they are now paying tax they shouldn’t be.

Matt Fryer, Managing Director of Brookson, said that the HMRC research should have included findings on incorrect determinations or status determination statements.

“HMRC seems keen to highlight that this represents just 2.5 per cent of the total self-employed workforce, and less than one per cent of the total workforce. Is this an indication that the government is content with the unfairness of this outcome?,” he said.

2 . Timing of research doesn’t paint ‘accurate picture’

By focusing on the period between March 2020 and September 2021, the research failed to give an accurate indication of the before and after scenario, according to Dave Chaplin, CEO of IR35 Shield.

This is because most businesses had already changed their working practices as the delay to off-payroll working reforms was announced just three weeks ahead of the original deadline in April 2020.

“Choosing March 2020 as the baseline is somewhat of a statistical howler and means the report paints a less disruptive picture than what occurred in reality,” Chaplin said.

3 . Underestimating the upheaval of IR35 reform

The HMRC report fails to tell the story of the impact of changing off-payroll rules in 2021, according to Seb Maley, Chief Executive of Qdos:

“Read this report and you’d think that the off-payroll rules have been plain sailing.

“We’re…told that half of businesses have found it ‘easy’ to comply with the off-payroll rules, and that around eight in ten firms assess IR35 status on a case-by-case basis.

“These statistics paint a nice picture, but I would take them with a pinch of salt. True, more businesses are getting to grips with these rules, but it’s been a difficult journey.”

4 . HMRC should have spoken to contractors and accountants

A former HMRC employee and now Co-Founder of Bauer & Cottrell, Kate Cottrell said the findings were “questionable” due to a lack of perspectives.

She commented: “To make this research have any value, you cannot limit it to asking just one party that has been affected by IR35 reform, even if you are only seeking short-term effects.

“For starters ask contractors how easy it was for them; ask all the accountants how many contractors they have lost and ask all the umbrellas how much new business they have gained.

“Ask the agencies how their client and contractor bases have changed; ask all the trade bodies, insurance providers and accountancy institutes how IR35 reform has been for them.”

5 . A pool of survey respondents that was too small

Cottrell went on to criticise the number of respondents to HMRC’s survey.

She said there should have been evidence from “tens of thousands of real-life experiences” instead of 353 calls and 39 follow-up interviews.

“It really is time for some balance, to seriously establish the short-term effects and of course the longer-term ones right up to the present day,” Cottrell commented.

“A key question is how much HMRC has spent on it all. Noticeably absent from this report, I suspect it will be an astonishing amount,” she added.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

HMRC responds to IR35 criticism

Responding to the negative comments about its study, an HMRC spokesperson said: “This reform has succeeded in improving compliance with the off-payroll rules, with more people who work like employees paying tax like employees, levelling the playing field.

“It is nonsense to assert that most businesses had changed their workforces by March 2020. Our analysis shows only 20,000 of the 130,000 workers identified who changed the way they work due to the 2021 reform had done so by March 2020.”

By Conor Shilling

Source: Simply Business

The dust hasn’t even yet settled on chancellor Kwasi Kwarteng’s announcement that IR35 reform of 2017 and 2021 is to be repealed, but the scaremongering has already begun.

There’s also the speculators, the cynics, and the so-called ‘experts’ – those with vested interests, and those bitter from being left out of the conversation. And they are on top of the odd article unhelpfully and boldly claiming to contain no less than “everything” IT contractors need to know about the reform’s repeal. If only it was that simple, writes former HM Treasury secondee and ex-tax inspector Kate Cottrell, the co-founder of IR35 specialists Bauer & Cottrell.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

As of October 2022; what are we seeing?

The initial euphoria, expressed by many following the chancellor’s announcement that the Off-Payroll Working (OPW) rules are to be repealed from April 6th 2023 has died down.  There are three main reasons for this:

1. Is it really going to happen? Nothing has changed yet and we have a Budget coming up in November, preceded by a government already doing a U-turn on its 45p tax rate plan. The possibility of further U-turns therefore seems significant. Fingers crossed that this promised repeal of the OPW rules goes ahead. But it’s not certain.
2. End-clients (both public and private sectors), agencies, umbrella companies, accountants and IR35/OPW advisers are all taking stock and wondering how this could affect their business. And yes, that goes for me too!
3. Contractors are realising that unless they have always been outside IR35 and working for ‘small’ companies (not affected by the OPW rules), that their own circumstances are complicated.  Notably where the contractor is:

• currently with an umbrella, or
• holding an SDS where the client has stated ‘inside IR35’, or;
• regularly jumping between their PSC and an umbrella company depending on the IR35/OPW assessment.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

Beware scaremongering

At this stage (Q4 2022), nobody knows how the repeal of the OPW rules will work. That’s the unpopular, hard truth. So — many commentators are reaching for their crystal balls, with some suggesting that there will be new rules for contractors added onto the IR35 rules of old (2000), such as requiring contractors to complete Status Determination Statements. There’s even the odd whisper that end-clients will continue to determine IR35 status; that blanket bans on using PSCs will continue indefinitely, and that HMRC will declare some sort of ‘amnesty’ on prior SDSs with ‘inside’ results. As interesting as they are, these really are only opinions at this stage and should be taken as nothing more.

It is impossible to make concrete plans, yet

Until we see the detail of the IR35 reform repeal in black and white via the Finance Act, it is only possible to try to plan, and consider risks based upon scenarios that may be realistic. That’s where we can have some sympathy for the genuine, qualified, advisers in this space trying to look into the future.

Fortunately, HMRC has promised further guidance for contractors unfamiliar with the IR35 regime. But it is likely (in my view!) that this guidance will be in the form of a referral to the guidance already in place. My expectation is for a straightforward repeal of the OPW rules, with no add-ons, changes, and nothing new that has not already been in place since April 2000.

What can you do in the next six months?

Every part of the contracting chain needs to use this time to analyse the effects on their own businesses and it is vital that all get up to speed with IR35 version one (2000). 

We have seen many “IR35 experts” born since the advent of the OPW rules, and I’d caution contractors to be very careful as a result. These so-called ‘experts’ are, perversely, actually very well-positioned if it pans out that the only thing that changes post-April 6th 2023 is who makes the IR35 decision, and who is liable for getting that decision wrong. For our part, our advisory will continue to work with the same case law precedent, and keep a keen eye on the cases going through the tribunals and courts.

What is the best advice for contractors over the next six months?

• Keep watching the contractor press for developments (the contractor ‘press’ that doesn’t just stick a press release up!).
• Decide what you want to do — if you could.
• Collect and keep all evidence including SDS outcomes, online IR35 status tool outputs, end-client correspondence, contract review results, and working practices changes/opinions.
• Find out about your personal situation now, to see what the options and (above all else) the risks are, and if a change in your status is feasible.
• Speak to your client and find out what their position may be come April 6th 2023, especially if you are contracting with an organisation that has banned PSCs.
• Take advice from only those that, as impartially as possible, understand all the rules (from 2000 onwards), and ideally those with hands-on experience of successfully defending IR35 HMRC investigations.

Final thought

In short, make good use of the next six months so you are ready for April 6th 2023!

The IR35 reform will be repealed from April 6, 2023, according to this morning’s mini-Budget.

Speaking to the House of Commons today (September 23), Chancellor Kwasi Kwarteng said from April, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.

Kwarteng also used today’s mini-Budget to scrap the additional rate of income tax and cut its basic rate to 19 per cent in a series of tax cuts which amount to £45bn.

The 2017 and 2021 reforms to the off payroll working rules – also known as IR35 – were a tax law that required the end client, and not the contractors they hire, to decide if the working relationship resembles a self-employed engagement or employment.

Under existing rules, the fee-paying party (either the end client or recruitment agency) shoulderd the liability.

The aim of the reform was to stop the promotion and misselling of disguised remuneration schemes, however the legislation has received criticism.

Kwarteng has repealed these reforms as part of the first steps in taking complexity out of the tax system.

He said: “To achieve a simpler system, I will start by removing unnecessary costs for business. We can also simplify the IR35 rules and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

“So as promised, by the prime minister, we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”

The changes will mean workers will once again be responsible for determining their employment status and paying the appropriate amount of tax and national insurance contributions.

This will free up time and money for businesses that engage contractors which the chancellor said could be put towards other priorities.

The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

IR35 reforms
In August, prime minister Liz Truss gave an interview where she indicated she would review the IR35 reforms.

The reforms were introduced in April 2021 to the private sector, and means that the responsibility for assessing whether a contractor is self-employed or employed is now with the end client, and not the contractor themselves.

The liability, and therefore financial risk, was also transferred to the fee-paying party.

The changes have been branded “a mess”, “unpopular” and “puzzling”.

The controversy surrounding the changes prompted the former chancellor, Sajid Javid, to pledge a review of IR35 as part of the Conservative party’s manifesto in the lead up to the general election.

By Sonia Rach

Source: FT Adviser

Yet another public sector body looks to have fallen foul of IR35.

This time, it’s High Speed 2 (HS2) – a government-funded arm of the Department for Transport – that is readying itself for a £9.5million tax bill.

If confirmed, this latest IR35 calamity in the public sector would take the cost of non-compliance in government departments well past £270m, writes Seb Maley, CEO of Qdos.

As revealed in HS2’s annual accounts, the £9.5m has been set aside in the event that HMRC confirms that mistakes have been made following the introduction of IR35 reform in the public sector in 2017.

A public sector IR35 problem of a different kind
But HS2’s IR35 problems look to be slightly different from those experienced by the likes of the Ministry of Justice, Defra and the Home Office, to name but a few. Instead of incorrectly assessing the IR35 status of contractors engaged – which has been an issue for the aforementioned departments – confusion looks to have arisen with regard to a consultancy providing contractors to HS2.

“During 2020, internal checks and additional HMRC’s guidance highlighted some cases of workers who were engaged through other suppliers that had not been appropriately reviewed”, the accounts state.

Get in touch with UK Contractor Mortgages today to discuss your Buy to Let & Residential Mortgage requirements.

Them, not us
Put differently, HS2 didn’t carry out IR35 assessments or issue Status Determination Statements (SDS) to contractors engaged via a third-party, given it took the view that this third-party was responsible for determining status.

If the third-party supplied a genuinely outsourced provision of labour, this would be true and HS2 wouldn’t be required to carry out IR35 determinations. But if the third-party is merely providing contractors, the buck stops with the end-client – in this case, HS2.

This is why HS2 has allotted £9.5m, ready to settle up with HMRC, should the tax office find that not only has the high-speed railway organisation misunderstood its responsibilities under IR35, but potentially also engaged contractors under the wrong IR35 status.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Wider implications of HS2’s potential IR35 slip-up
Eye-watering tax bills aside, the worry is that it could see another public sector body take a needlessly risk-averse approach to IR35. That’s been a ‘strategy’ adopted by far too many organisations due to a lack of understanding with regards to how the revised off-payroll rules can be implemented compliantly because contractors can, in fact, be engaged outside IR35.

It’s my view that banning contractors would jeopardise the entire HS2 project. Giving contractors ultimatums – ‘work inside IR35 or via umbrella companies’ – will result in significant skills gaps, as contractors opt to work elsewhere with businesses offering genuine contractors the opportunity to operate outside IR35. In a space which relies heavily on specialist skills and the need to engage these skills in a cost-effective manner, transferring all contractors onto the payroll increases costs dramatically.

HS2 is risk-averse on IR35 anyway
With that being said, it’s not as if HS2 has a habit of engaging contractors outside IR35. Its accounts show that just 20 of the 294 contractors engaged between April 2021 and March 2022 operated outside IR35. That’s a figure which is at odds with the 86% of more than 32,000 contractors that our IR35 contract review business has assessed on behalf of businesses which, after a rigorous assessment, in our view belong outside IR35.

Focusing on how the contractors were supplied to HS2, which as I mentioned was via a third-party consultancy, above all else, it highlights just how important it is that both the end-client and the consultancy understand which party is responsible for determining IR35 status, along with their wider obligations under the reform.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

The ‘contracted out’ conundrum? It spells o-p-p-o-r-t-u-n-i-t-y to HMRC
So will we see more of this – not just in the public sector – but in the private sector too?

Don’t rule it out. Engaging contractors via a third-party means there is a slightly different consideration for end-clients which, as I previously outlined, is whether or not the provision of labour is genuinely outsourced or not. HMRC will be well aware of this — of course, and could well scrutinise these arrangements on a wider scale.

Added to this is the economic landscape and the pressure that HMRC is under to raise tax revenue for the Treasury. Going forward, I expect the tax office to ramp up IR35 compliance activity among businesses generally speaking, but also focus on these specific areas where confusion can easily arise, which presents an opportunity for HMRC.

By Seb Maley

Source: Contractor UK