The Government has announced that the recent reforms to the off-payroll working rules (a part of the rules around "disguised employment" also known as IR35) will be reversed from 6 April 2023 for both private and public sector organisations. As a result, contractors providing services through a personal services company will once again be responsible for determining their own employment status and paying the appropriate amount of tax and NIC.
The off-payroll workings rules are a set of anti-avoidance tax rules designed to ensure that contractors working in the same way as employees but via intermediaries (such as personal service companies) are taxed like employees. The rules work by asking whether the contractor would be an employee if they engaged directly with the end client, rather than via an intermediary. If the answer is yes, then the contractor is effectively subject to income tax and national insurance contributions (NIC) in a similar manner to an employee.
Originally, the responsibility for determining a contractor's employment status under the rules (i.e. whether the contractor's working relationship resembled a self-employed engagement or employment) rested with the contractor's intermediary. Compliance with the rules and payment of any associated tax and NIC was therefore the responsibility of the contractor, and not the end client.
However, in 2017 and 2021 reforms were introduced to the public and private sectors respectively which shifted the responsibility for determining a contractor's employment status to the organisation engaging with the contractor. The aim of the changes was to improve compliance with the existing rules, but the legislation received criticism, particularly from industry bodies representing contractors, who felt that end clients were often being unduly cautious in their employment status determinations.
As previously trailed by the Prime Minister during the Conservative leadership election, the Government today announced that the reforms introduced in 2017 and 2021 will be repealed with effect from 6 April 2023 for both public and private sector businesses. From this date, contractors providing services through an intermediary will once again be responsible for determining their own employment status and paying the appropriate amount of tax and NICs.
Whilst the reforms are likely to be welcomed by contractors and businesses, the changes do not mean the end of the 'IR35 story' – the rules will still exist - it is just that contractors will again be responsible for compliance. Businesses are also likely to remain exposed to tax risks associated with engaging contractors, particularly if they know that a contractor should be taxed as an employee. Some business may also be frustrated that the reforms come after many have spent significant time and resources on compliance over recent years.
Return to Mini Budget 2022.
Follow us on LinkedIn for updates from Travers Smith Tax.