The Government recently decided to repeal the off-payroll reforms from both the private and public sectors. Here, we explain what’s happened and the implications for recruitment supply chains.

What is IR35? – Old IR35

IR35 is a term used for two different pieces of tax law. The first, ‘Old IR35’ has been around since 2000, and is known as the intermediaries legislation. It is found in Chapter 8 of the Income Tax (Earnings and Pensions) Act, known as ITEPA.

The point of Old IR35 is to examine the situation where an intermediary, usually a worker’s own limited company, supplies the services of that worker to an end client.

An agency may be in place between the worker’s company (often called a Personal Service Company or PSC) and the end client, but this is not required for the legislation to apply.

The nature of the relationship between the worker and the end client is considered. A decision needs to be made as to whether this relationship would have been one of employment of the worker if the intermediary was not present.

If it was one of employment, then Old IR35 requires that employment taxes including Employer’s National insurance are operated on the income generated by the worker, and paid to HMRC by the PSC.

Critically in the case of Old IR35, the worker and their PSC are solely responsible for deciding if the rules apply, and paying any extra taxes due, which would in all normal circumstances be higher than those that might been paid if a tax-efficient mixture of salary, expenses and dividends had been used to extract value from the PSC.

If HMRC felt that a worker and their PSC had not applied the Old IR35 rules properly, they could challenge the position via assessment and the worker would either have to pay the extra tax due or challenge the assessment via the Courts and Tribunal system.

New IR35

HMRC found it hard to enforce Old IR35 and felt that compliance with the rules was low. In 2017 in the public sector, and 2021 in the private sector, a new piece of legislation was introduced, known as the Off-Payroll Working rules (OPW), found in Chapter 10 of ITEPA. In most cases this New IR35 rule trumped the Old IR35 rules, which still applied in limited circumstances.

These rules still centred on the deemed employment status of a worker-client relationship but there were two fundamental differences.

• The decision was now the responsibility of the end client, and the financial liability for employment taxes now rested with the party paying the PSC, (often an employment agency, if one was present) although that debt could move up to the end client if it wasn’t collected lower down the chain. If there was no party between the end client and the PSC, then the end client was both responsible for the decision, and liable for the additional tax risk if things went wrong.
• End clients had to issue a Status Determination Statement (SDS) and pass this down the supply chain. New processes had to be implemented and monitored, and in some cases supply chains decided to stop working with PSCs, so that the new rules did not need to be followed, instead using workers paid via employment, either directly, via agencies, or via umbrella companies.

What is changing?

In his Growth Plan 2022, the Chancellor Kwasi Kwarteng announced that the New IR35 rules will be repealed for work done from 6th April 2023.
In the absence of any new law replacing Chapter 10, this means that the old, Chapter 8 rules will apply once again, where they had been superseded by the new rules. Given the timescales, it is unlikely any new law will be in place by April 2023.

What does this mean?

Old IR35 will apply again, but we do not expect a full return to the situation prior to New IR35 arriving.
HMRC had persistent problems enforcing compliance, and they can be expected now to refresh their efforts and tactics ready for April 2023. They will consider using the Criminal Finance Act, the Managed Service Company rules and the Agency rules to enforce supply chain compliance in unfamiliar ways once the New IR35 has ceased to apply.

Prior to 6th April 2023 – New IR35 still applies.

After 6th April 2023 – New IR35 is no longer in place, but Old IR35 remains.

In summary, the compliance landscape post-April 2023 is not the same as it was before New IR35. New laws are in place that put more responsibility on the whole supply chain. HMRC has more information, and a ‘test period’ where some contractors changed their engagement model in response to legislation will inform their data analysis, and future compliance activity.

We’re here to help you navigate these uncharted waters.

How we can help you?

Workwell can support all parts of the supply chain with the upcoming changes.

Workwell Enterprise specialises in supply chain consultancy, helping end clients and agencies to understand how they can protect themselves against attack, both before, during and after the OPW rules apply.

Our trusted IR35 assessment tool, IR35 Complete™ is ready to assist supply chains and contractors achieve certainty in their status decisions.

We provide both umbrella service and accounting services to help workers whether as individuals or if operating as businesses in their own right. Both of these are accredited to the highest standards. We also have significant experience and expertise in construction, international contracting and back-office support services.

About us

We have over 30 years’ experience advising businesses, operating payroll and helping businesses succeed. We can provide consultancy advice on managing a wide range of supply chain tax and legislative risks and we have a market-leading IR35 status determination platform, optimised for contractors, recruiters and end clients.

Next steps

 Andrew Webster, MD, Workwell Enterprise

[email protected]

07827 810851

 Del Williams, Group Sales Director

[email protected]

07818 858683