The effects of the Chancellor’s emergency statement: IR35 and off-payroll live on
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
2 November 2022
Justine Riccomini updates readers on the latest developments in relation to off-payroll working
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 on 23 September?
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added unnecessary complexity and cost for many businesses”, he went on to say that the 2017 and 2021 reforms would be repealed from April 2023. By this, he meant the so-called Off-Payroll Working (OPW) rules at Chapter 10, Part 2 ITEPA 2003 would be repealed.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 left 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.
U-Turn
Three weeks later, on 17 October, the new Chancellor Jeremy Hunt announced that he was reversing the 23 September revocation of Chapter 10 and things were returning to how they were – therefore no changes would take place from 6 April after all insofar as the OPW legislation was concerned.
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, 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 “off the payroll” 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 is contained in Chapter 10?
The first iteration of Chapter 10, effective from 6 April 2017, imposes 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 is technically an employee or worker. If so, they have 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 are classified as “medium” or “large” according to the general rules in the Companies Act. As with public sector bodies, the onus is 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.
Keep calm and carry on
Employers, employment agencies, Umbrella Companies, Managed Service Companies and contractors working through intermediaries should all “keep calm and carry on” as before. In effect, nothing has changed in the IR35 and OPW context, and it is as if the Mini Budget of 23 September never happened.
ICAS maintains that the UK Government should carry out an urgent reform of Companies Act legislation, which might prevent the setting up and closing down of limited companies with impunity.
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