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In a surprise move in his first mini-budget, the new Chancellor, Kwasi Kwarteng, has scrapped the controversial and unpopular off-payroll legislation which previously meant that the responsibility for determining contractors’ IR35 status lay at the door of the end client. While some have welcomed the changes, others warn of a gaping hole in treasury finances as a result of this legislation. 

Here, we look at what it means and how it will affect contractors and end clients alike. 

What are the changes?

From April 2023 the off-payroll reforms, which were introduced into the public sector in 2017 and the private sector in 2021, will be repealed. Cited as causing excessive bureaucracy for end clients which led to some organisations imposing a blanket ban on contractors, the removal of the legislation has been received with cautious optimism.

The liability for determining the IR35 status of the contractor has now shifted back from the fee-paying end client to the contractor themselves. 

In repealing this legislation the government hopes that engaging a contractor and supplying your services as a contractor will become less difficult, enabling the flexibility that employers require in today’s workforce. 

What were the difficulties end clients and contractors faced?

End-clients, until the repeal of this legislation, are still responsible for determining the tax status of any contractors they engage, from whatever discipline or sector. They rely on a mechanism provided by the government called Check Employment Status for Tax which, based on the employee’s contract, enabled companies to check if the off-payroll rules applied to a contract or not, and whether HMRC considered the worker as either self-employed or employed for tax and National Insurance contribution purposes. 

However, there are many who maintain that the tool was fundamentally flawed. This led to problems for companies trying to abide by the rules, resulting in spectacular failures in the government’s own structure – with outstanding tax demands issued to various governmental departments of over £250 million – an amount the taxpayer will eventually have to reimburse.

The IR35 rules have also led to the increase in disguised remuneration schemes, many of which have a dubious record of compliance, and which not only flout the rules on paying a fair amount of tax, but can also leave contractors facing tax liabilities in the future. 

What happens next?

If the legislation is approved, from 6 April 2023 contractors operating through a Personal Service Company (PSC) will again be responsible for determining their own IR35 status and it will be the contractors themselves who designate their employment status as a non-payroll worker. Whether this will assist in raising the levels of compliance with the estimated 1.9 million self-employed contractors remains to be seen. 

Mr Kwarteng maintains that businesses will be freed up of red-tape, allowing them to concentrate their time and effort in other, more important, areas of their operations.

However, in this gig economy, businesses will still need freelance contractors and there is a risk that these companies may still be exposed to corporate criminal tax offences if they act in a non-compliant way, by paying contractors off-payroll when they are in effect employees. It will become a matter of trust between the end-client and the contractor.  

How can compliance be guaranteed?

The government has stated that it will make compliance a priority. However, after HMRC estimated that almost 90% of contractors were applying the rules incorrectly, and therefore fudging tax compliance, additional rules may well need to be introduced to ensure that the correct amount of tax is recovered from workers who are obligated to pay it. 

HMRC estimates that it will recoup £1.2 billion in additional revenues by 2023 under the new rules. Nevertheless, tax avoidance schemes may also proliferate, enticing those who wish to minimise their tax bills, and HMRC faces some tough decisions as to where to concentrate its energies after the new rules take effect. Mr Kwarteng has promised, however, to “keep compliance closely under review”. 

(You can read the full text of Mr Kwarteng’s mini-budget here. His IR35 reforms are mentioned in paragraphs 3.44 and 4.20.) 

End-clients and contractors alike are advised to seek independent advice before the reforms come in next April as to how best to proceed. Non-compliance is not an option and contractors must beware of disguised remuneration schemes that promise to reduce their tax burden excessively. End clients must also be aware of their tax liabilities in regard to off-payroll employees. 

Get in touch with Payme

The simplest and most effective way of maintaining a healthy relationship with HMRC for both contractors and end clients is to partner with a payroll company that takes its legal responsibilities seriously. 

Payme offers payment services for both end clients and contractors that legally maximise take-home pay, while ensuring that all tax and National Insurance liabilities are met in full. For more information contact us here.