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The hard truth about IR35 reform’s repeal and advice for contractors

The dust hasn’t even yet settled on chancellor Kwasi Kwarteng’s announcement that IR35 reform of 2017 and 2021 is to be repealed, but the scaremongering has already begun.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

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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euphoria, expressed by many following the chancellor’s announcement that the Off-Payroll Working (OPW) rules are to be repealed from April 6th 2023 has died down.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.

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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!

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Mini-Budget: IR35 will be repealed from April

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.

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“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.

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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

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What HS2’s £9.5millon IR35 tax provision means for contractors

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.

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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.

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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.

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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

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Contractor sector sceptical of potential tax cuts from an under pressure Boris Johnson

Contractors being potentially among the one in three adults who can afford basics but not always luxuries isn’t making the contractor sector into Boris Johnson’s whispered tax cuts.

Reportedly recommended to the prime minister as a way to heal rifts after he narrowly survived a confidence vote, any tax cuts would usually be embraced by contractors.

After all, contractors are “up against IR35 reform, dividend tax rises and [potentially] an incoming hike to corporation tax,” Qdos’s Nicole Slowey pointed out yesterday.

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‘Token gesture’
But another specialist in contractor taxation, Graham Webber of WTT Consulting, says he expects any tax cut from Mr Johnson to be only a “token gesture”.

The PM’s trying political circumstances, plus the government’s tendency to legislate against contractors rather than incentivise it via tax cuts, makes his expectation creditable.

But in a thread featuring both the tax specialists, a Test Analyst said that if any of the tax cuts resemble Spring Statement’s 5p cut in fuel duty, the government can “keep it.”

‘Forced bribe’
“At this stage [from Mr Johnson], it would be a forced bribe,” said the analyst, a self-employed contractor. “It would only be announced to make Boris look better, not to help us”.

The prospect of tax cuts has prompted Mr Johnson’s most supportive national newspaper, the Daily Telegraph, to identify a fuel duty reduction as the most important of five he may make.

The right-leaning broadsheet said a close second would be for the PM to abolish the 5% VAT charge on heating fuels — as Mr Johnson has previously promised to do.

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‘Attacks on contractors’
Yet a consultant posted yesterday that it’s not ever Number 10’s decision to cut taxes – it’s Number 11’s.

“[Chancellor] Rishi [Sunak] and the Treasury are in charge of taxes, not Boris,” the consultant said.

“[Following the many] broken promises and attacks on contractors over the last few years, it will take a lot [for either Mr Sunak or Mr Johnson] to win back support — and trust.”

‘Government handling taxation badly’
A YouGov reading of June 2nd shows 69% of adults believe the government to be handling of the issue of taxation “badly.”

Income tax is the levy which people would least like to be increased by the government, followed by council tax, and then National Insurance, the pollster found in May.

Speaking since the findings, Keith Gordon QC has pinpointed what he would most like to see in relation to the contractor sector’s most notorious tax rule.

In a phone-in with LBC about the off-payroll rules, the tax barrister said: “I hope someone will go back to the drawing board and decide IR35 is not fit for purpose.”

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‘Unwelcome letters from HMRC’
A revoking of the Intermediaries legislation is even more of an outside bet than tax cuts from the prime minister, so accountants say it’s ‘business as usual’ this tax return season.

“With tax returns on the mind of many pro-active taxpayers, something often forgotten on the tax returns of those submitting early, is benefits-in-kind,” advises Adam Dove, senior client accountant at Orange Genie.

“With P11Ds not due for submission until July 6th 2022, it is important to ensure your employer has submitted your P11D and you have the details before you complete your self-assessment tax return, to avoid any unwelcome letters from HMRC with amendments, interest and, or, penalties.”

By Simon Moore

Source: Contractor UK

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IR35 is the biggest threat to the contractor working model, survey finds

The majority of contractors see the UK’s IR35 changes to the way employment status is judged as the biggest threat to their business in 2022, according to recent research.

A survey of more than 1,200 contractors by IR35 insurance provider Qdos shows that 61 per cent see the rule changes as the “biggest threat” to the contracting business model, which is said to be worth more than £300bn annually to the economy, according to the IPSE, the contractors, consultants and interims association.

Qdos found this was more than 10 times the number of contractors most concerned about the impact of coronavirus (6 per cent) or Brexit (6 per cent). Incoming dividend tax increases (18 per cent) were earmarked as the second biggest threat, although only a third of folk surveyed were concerned about those changes.

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The introduction of IR35 reform to the private sector on 6 April 2021 saw the responsibility for assessing IR35 status shift from the contractor to the medium or large business engaging them. As part of this reform, which mirrors changes introduced in the public sector in 2017, the liability also shifted, from the contractor to the fee-paying party in the supply chain (either the recruitment agency or client).

Qdos CEO Seb Maley said: “IR35 reform has created a plethora of challenges for contractors, jeopardising this way of working for thousands. The fact that contractors still see IR35 as the stand-out threat in 2022 – and by some distance – tells you everything you need to know about the journey ahead, along with the progress that needs to be made this year.

“Not only will this see businesses struggle to attract the flexible talent they need to recover from the pandemic, but forcing genuinely self-employed people onto the payroll will also result in significant and needless cost rises.”

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Qdos’s research found that 39 per cent were “confident” about their prospects for 2022. However, 37 per cent were either “concerned” or “very concerned.” There was an 83 per cent rise in contractors deemed outside IR35 by their clients from April to November 2021.

Even the government’s own departments are having trouble with IR35. In December it was revealed that guidance from Her Majesty’s Revenue & Customs’ employment checker tool had led to wrong calls on the tax status of freelance workers, costing £120m across two Whitehall departments.

Financial reports from the Ministry of Justice and the Department for Environment, Food and Rural Affairs show they face combined additional tax bills of at least £121m due to incorrectly determining the status of their contractors, despite following HMRC’s “accompanying guidance” and using HMRC’s Check Employment Status for Tax (CEST) tool.

IPSE research from October 2021 found 35 per cent of contractors in the UK had become permanent employees, retired, shifted to work overseas or are “simply not working” since IR35 tax legislation was revised in April 2021.

By Lindsay Clark

Source: The Register

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Thousands of companies throughout the UK may be breaking IR35 rules

Thousands of companies throughout the UK may be breaking the IR35 rules when it comes to reviewing the status of the freelance contractors who work for them, say tax and advisory firm Blick Rothenberg. The warning comes at the end of National payroll week and Robert Salter a client service director with the firm.

Since April Companies are required to assess whether each contractor is working in a pattern which is ‘akin to that of an employee’ unless they are exempt from the IR35 requirements as small enterprises.

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Businesses are now legally obliged to account for PAYE and NICs on the invoices it receives from PSCs rather than simply paying them on a gross basis, where the contractor is held to be a ‘deemed employee’ of the end business. Failures by the businesses using freelance contractors in this regard can result in the business being liable to Interest and penalty charges in respect of the underpaid tax (with penalties potentially being as high as 100% in some scenarios. They must account for the PAYE which should have been accounted for and are liable to employee and employer NICs on the invoices.

Although the new legislation has been in place since April many businesses who are impacted by the IR35 changes are actually either (a) totally unaware of the new regulations, or (b) have not been able to invest in training staff vis-à-vis their obligations in this area and the obligations which one needs to meet, to protect the business from unwelcome tax and NIC charges.

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Whilst these shortcomings are inevitable given the pressures businesses have been experiencing with Covid and the underlying difficulties associated with the core regulations – which are hard to understand and apply in practice – such factors will not provide businesses with any meaningful ‘defence’ in the case of a formal Revenue enquiry into this area.

Moreover, businesses need to realize that HMRC teams have been staffed to specifically address this issue on a going forward basis, so the chance of receiving future enquiries in this regard are significant for most businesses.

On an going forward basis, businesses should – if they haven’t already – start reviewing the position of their contract employees and ensuring that these reviews are clearly documented. If this delayed review does highlight any problems, they should discuss the position with their advisors as a matter of urgency. If they don’t, they risk getting into even more problems and difficulties over the coming months and years.

By Barney Cotton

Source: Business Leader

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