Everything you need to know

Among one of the many initiatives contained within the “mini” budget unveiled at the start of October by Chancellor Kwasi Kwarteng was one primarily aimed at self-employed workers and a controversial one at that. 

Changes to the IR35 system were first introduced in April 2021 which made contractors responsible for determining the employment status of freelance workers. Now from April 2023 the system will revert back to the original rules where freelance workers will be responsible for assessing their own tax. 

We’ve written about the changes previously but briefly From April 2017 and once again in April 2021 many contractors who operated through their own limited companies were reclassified as employees.  

This significantly increased the tax burden for the companies that hired them as they were now redesignated as employees. 

But what if instead of creating a huge rush of employees becoming contractors once more, the proposed abolition of the IR35 rules just reimposed the risk of getting the rules wrong on the contractor and their personal service company?

In the budget, the Chancellor referred to the IR35 or off-payroll working rules which set out who was responsible for deciding if a contractor or freelance worker should actually be treated as an employee for tax purposes. 

What is interesting is that the underlying IR35 rules might not have changed at all. 

In the published Growth Plan 2022 document (paragraph 3.44), the statement reads “The 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) will be repealed from 6 April 2023.

Which sounds clear but there is a crucial sentence afterwards which continues: “From this date, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of taxes and National Insurance Contributions (NICs).”

So what does this mean?

It’s apparent from this statement that IR35 will continue to exist from April 6 next year, although the legislation will have to be changed to remove any reference to the off-payroll rules.

HMRC Still Active

What is also apparent is that HMRC are still going to be active in their investigations and inquiries into personal service companies and who hired them both under the off-payroll rules active from 2017 to 2023 and under the IR35 rules that take in the periods before 6 April 2021 and after 5 April 2023. 

The biggest intractable problem at the centre of IR35 of off-payroll working has always been the employment status of the individual worker. 

Over the past 18 months (for private sector businesses) and five years (for public sector), workers have been issued with numerous status determination statements (SDS). 

This records the decision that the worker is either within the IR35 rules and should be taxed as an employee or is not.  Several large companies made blanket declarations that whole classes of workers are one or the other and rightly or wrongly many workers didn’t feel comfortable or confident in challenging the SDS decision. 

If their SDS states that they are within IR35 then it will be difficult for them or the company they do work for to reverse that next year. 

A group called the Low Incomes Tax Reform Group (LITRG) is already worried that the removal of off-payroll working rules will mean that relatively low paid agency workers will be forced to establish and work through limited companies by agencies or umbrella companies which was the norm before the off-payroll rules came into effect.  It saved money within the supply chain but ultimately created significant problems for the workers themselves. 

Meredith McCammond from LITRG said: “The off-payroll rules weren’t perfect but they removed this incentive. 

“Those at the lower end of the income spectrum who find themselves working through a limited company have very little understanding of how these legal entities operate. 

“They often separate out their own affairs from those of the company, and stand very little chance of handling their tax affairs correctly, let alone being able to deal with and comply with the Companies House requirements. 

“This can lead to messy and expensive compliance issues that can follow the worker around for years in some instances.”

Chris Horner, Insolvency Director with BusinessRescueExpert said: “We saw a large number of Members Voluntary Liquidations (MVLs) during this period as workers who were now reclassified as employees didn’t need or want to have their own company anymore.

“There was also an increase in Company Voluntary Liquidations (CVLs) with many of these companies taking on bounce back loans and struggling to make repayments before they closed. 

“If the new changes do come into law then many workers who became employees because of the initial changes will be pushed to become contractors again – some of whom will have dormant companies that will still have unpaid bounce back loans and increasing tax debts attached to them. 

“If the owner of these types of businesses wanted to become a contractor again, it would make sense for them to liquidate their business through a CVL, taking care of these historic debts legally, and being able to start again – debt-free – with a clean slate.

“As LITRG have noted, the pressure on individuals to work as or under an umbrella company or as a limited company will increase as some companies look to increase profit and reduce their obligations within a supply chain. 

“The chance of accidentally falling foul of the rules will only increase going ahead so the time between now and April 6 2023 is ideal for them to get some advice on dealing with any existing issues or before they act in creating new ones.”

Of course this might not come to pass as other elements of the budget have been repealed due to various degrees of pressure being applied and there is no head of steam gathered around not implementing changes to IR35 rules – yet. 

We wouldn’t rely on crossing your fingers as a strategy in the next seven months before any changes are due to happen but would advise taking the initiative and getting in touch to arrange a free consultation with one of our expert advisors

Based on your situation – whether you have a limited company you are thinking of closing or if you want some impartial advice on what to do next regarding regulation changes – they will be able to give you a range of options available to you to choose to move forward. 

No matter what changes happen in the next few weeks and months – BusinessRescueExpert will always be there to listen and help you make the best decision both for you and your company.