Friday, 23September, will go down in history as a day to remember. It was the day that the new Chancellor, Kwasi Kwarteng, announced a series of far-reaching and impressive tax cuts and reforms in his bid to make the UK a more competitive and more desirable place to conduct and be in business.
One notable announcement was the Chancellor’s signalled intention to repeal the off-payroll working legislation from April 2023. The industry had been expecting to hear if Liz Truss would stick to her promise to review the legislation. A repeal was the U-turn that no one saw coming. If it comes to pass, contractors will again be responsible for assessing their IR35 status in line with the original Intermediaries Legislation.
>See also: Freelancers could avoid tax because of IR35 loophole
Since the off-payroll rules have been in effect in the public and private sectors, since 2017 and 2021, respectively, they have proven to be very contentious and have served only to operate against contractors, the firms which hire them and the entire UK flexible economy. The legislation has poured glue on the economy and stifled growth. The Chancellor should be applauded for removing an unnecessary onus for any firm that wants to hire a worker on a flexible basis. Finally, it would seem that dissenting voices have been heard, and common sense has finally been restored.
However, a lot of damage has been done along the way. Freelancers and contractors have been unfairly treated and targeted by HMRC regarding their employment status because HMRC believed that the Treasury’s coffers were missing out on millions of pounds in tax. In its drive to class as many flexible workers as possible as employed for tax purposes, HMRC mispresented the laws on employment status. These mistakes manifested in the Check Employment Status for Tax (CEST) tool. This simplistic status testing tool has been labelled unfit for purpose by barristers, lawyers and tax experts.
>See also: Ensure your contract keeps you out of IR35
The off-payroll legislation was flawed from the start and has been costly for UK plc, highly damaging for the UK economy and a political calamity for the Conservative Party. Thankfully the new Chancellor has taken back control of tax policy and is starting to heal the relationship with the self-employed – but there is more to be done.
In early 2022, the off-payroll rules were scrutinised by the National Audit Office and the Public Accounts Committee, where MPs probed the public sector’s £263 million of IR35 errors, commenting that structural problems remain with IR35.
HMRC believes the rules are in place to create a level playing field. Policymakers have made an almost hysterical witch hunt to clamp down on the same group of workers the Government purports to support and frustrate their entrepreneurial efforts. Economic growth will only be stimulated by delivering contractors and freelancers the freedom to contract without fear of retrospective tax measures and firms to source expertise when needed without the spectre of employment tribunals. Let’s hope that come April 2023, this can now happen again.
Off-payroll legislation – what happens now?
But in the run-up to April 2023, what happens now? The repeal of off-payroll is currently intent but not in the statute. The next Finance Bill will need to be drafted, laid before the house for first reading, and then travel through Parliament. Initial drafts for an autumn bill will likely be seen around November, reaching royal assent sometime in February or March 2023. We know from experience that delays can happen at the last minute, and for now, off-payroll is still binding law.
So, all parties should carry on as usual for now but have a transition plan at the ready. But, beware, if off-payroll goes, IR35, in its original form, will be revived and return much more potent.
Tips for IR35 contractors
- Do not ignore IR35 because enforcement will happen
- HMRC has much more data and tools available to crack down on tax avoidance and will continue to enforce IR35 from 2023
- Be aware of the brutal Management Service Companies Legislation – avoid “tax loss” insurance policies that cover repayment of taxes and penalties
- Do educate yourself on the original IR35 legislation. Conduct your IR35 assessments to know that you are operating “outside IR35” and pay the correct tax
- Do stay informed and be prepared
- Be sure to obtain a Tax Investigation Service to defend yourself against the taxman
Dave Chaplin is CEO of IR35 compliance solution IR35 Shield and author of IR35 & Off-Payroll Explained
More on off-payroll legislation and IR35
IR35: How the controversial tax changes have left self-employment on the ropes