The effects of the Mini-Budget: IR35 lives on, but ‘off-payroll’ may well be dead
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
14 October 2022
Justine Riccomini sets out the UK Government’s announcements in the Mini-Budget affecting those providing services through intermediaries, which are due to take effect from April 2023
Social media posts across the contractor community fervently celebrated the demise of IR35 after Chancellor Kwasi Kwarteng delivered his Mini-Budget speech on 23 September 2022. However, the jubilation was perhaps a little premature, with calls of “IR35 is dead” and similar sweeping statements being bandied around on Linkedin, Twitter, Instagram and Facebook.
What actually happened?
When Kwarteng announced the Government would “simplify the IR35 rules” because “reforms…have added unnecessary complexity and cost for many businesses”, he went on to say that the 2017 and 2021 reforms would be repealed from April 2023. By this, he meant the off-payroll rules at Chapter 10, Part 2 ITEPA 2003 would be repealed. Noting that announcing a repeal of legislation without due consideration of a repeal Bill by the Houses of Parliament is a very unusual move, this still leaves Chapters 8 and 9 of Part 2 in place. Chapter 8 is the original (but amended due to the introduction of Chapter 10) legislation concerning itself with the provision of services through an intermediary (a.k.a.“IR35”) which came into force in April 2020, and Chapter 9 is the legislation which concerns itself with Managed Service Companies.
A reminder of how it all began – with Chapter 8
HMRC (or Inland Revenue as it was then) became aware in the mid to late 1990s that many people (mostly in the IT sector to begin with) were leaving employment and setting up their own limited company to provide the same or similar services to their ex-employers, who were now clients. The use of a corporate intermediary, together with suitably worded contracts for services, prevented the client from having to operate PAYE, which saved them employer NICs, and the individual was no longer accruing employment rights. The individuals tended to pay themselves a salary equal to the UK Personal Allowance and a dividend, which generally saved them a fair amount of income tax. HMRC considered that this form of tax avoidance was affecting income tax receipts disproportionately and thus resolved to tackle it.
A 1999 Budget Press Release number ‘IR35’ proposed an anti-avoidance measure termed “Intermediaries Legislation”, and Chapter 8, which was originally effective from 6 April 2020, imposed a duty on anyone providing personal services through an intermediary company to assess their own employment status in the context of the relationship between the contractor and the “end user” client. If the contractor had 12 clients, a status test should be performed on each of the 12 relationships. Where the test indicated that the individual was, but for the intermediary through which they provided their services, working as an employee, the contractor should perform a “deemed employment income calculation” on the earnings from that hypothetical employment contract.
Over time, HMRC (as it was known from 2005) became dissatisfied with the level of non-compliance with Chapter 8 and recognising its limited resources for physically carrying out inspections, and noticed that there had been a somewhat metastatic rise in the number of Managed Service Companies, agency-based working and Umbrella Companies, as well as a new form of “gig” working practices in the interim. They began to consider alternative policy measures which might assist with correctly classifying people working as contractors and potentially enable them to recoup that all-important PAYE and NICs revenue, eventually settling upon a measure which became Chapter 10. This was important because Chapter 8 had only resulted in very limited yield from a very small number of compliant contractors. Bearing in mind that it is Income Tax, VAT and NICs which keep the lights on, something simply had to be done.
What was contained in Chapter 10?
The first iteration of Chapter 10, effective from 6 April 2017, imposed a duty for public sector bodies to review the employment status of any contractors providing services to them, produce a Status Determination Statement (SDS) and use this to decide if the contractor was technically an employee or worker. If so, they had a duty to incorporate them on to the payroll.
The second iteration of Chapter 10, effective from 6 April 2021, amended it to include private sector businesses that were classified as “medium” or “large” according to the general rules in the Companies Act. As with public sector bodies, the onus was on private sector businesses fulfilling the qualifying criteria to assess the status.
Chapter 8 was then also amended to say that it now applied only to instances where contractors provided services to “small” businesses – again as defined in the Companies Act.
Compliance - beware
It is likely that as with any area of change in taxation approach, HMRC will continue to take an interest in workers who were determined under Chapter 10 to be ‘Workers’ or employees but who revert back to working through their own intermediary. They will wish to understand why the changes have taken place and what is different. Reviews can of course straddle the old and new rules,so it is important for tax advisers to ensure they understand the full picture.
Employment rights
Care should be taken, and HR or employment law advice sought, where an employee or worker has accrued either a full or limited suite of employment rights to ensure the engager/employer is not in breach of these rules. Remember that those providing services to public sector bodies will have been working for them for up to six years by April 2023, and up to two years for private sector businesses.
What happens now?
If Chapter 8 is to remain, it will need to be amended to take account of the revocation of Chapter 10. HM Treasury has stated that more information will be provided prior to April 2023 – but ICAS hopes for information as soon as possible so that businesses, individuals and their advisers can prepare with adequate lead-in time.
However, if the main concern prior to 2017 was non-compliance, then simply reverting back to Chapter 8 is not the silver bullet everyone is hoping for. There are concerns that lower paid workers (who could be working through agencies) with little negotiating power will once again be pressurised into working through limited companies, and the bad habits of the past will re-emerge.
Time will tell if the off-payroll reforms of 2017 and 2021 are truly dead – reversals are always possible – but if they are dead, something suitably robust should take its place. Hopefully any measures will be accompanied by a reform of Companies Act legislation which might prevent the setting up of limited companies with impunity.
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