Repeal of IR35 reforms: IR35 expert Paul Mason shares his thoughts
The IR35 reforms we saw in the public sector in 2017 and the more recent reforms in the private sector in 2021 had a great impact on many self-employed professionals.
But in recent weeks, it’s been announced that the government has decided to repeal the reforms from 6 April 2023. In this article IR35 expert, Paul Mason, shares his thoughts on the repeal, explaining what it means for the self-employed, points contractors should consider and what's next for IR35.
IR35 reforms scrapped – what it means for contractors
IR35 Off-payroll working repealed? Nobody saw that coming!
A momentous U-turn, but is it all good news for contractors engaged through their Personal Service Companies (PSCs)?
Certainly, it represents a return of control for PSCs over IR35. From 6th April 2023, as noted in The Growth Plan 2022 (the document released by the Treasury immediately after the Budget): “workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of … tax and National Insurance contributions…. The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.”
Yet control of your own destiny comes with responsibility and liability.
Understanding the IR35 reforms
Firstly, you need to understand IR35, a complex and grey area of tax, where the premise of decision-making rests on creating a hypothetical contract. IR35 determinations are based on the interpretation of case law; there is no legal definition of an employee, let alone what makes you self-employed.
Secondly, HMRC may disagree with your opinion of the engagement. Contractors under enquiry will find themselves wrapped up in detailed, technical and expensive arguments with those unfortunate enough to go to Tribunal reliant upon how all the parties – including the judge – perform on the day.
Thirdly, many contractors who understandably closed their companies when they found that the opportunities for (outside IR35) engagements were limited are likely to incorporate again and returning to the same activities they were pursuing previously. However, there is a targeted anti-avoidance rule (TAAR) designed to deal with what is called ‘phoenixing’ (liquidating a PSC, extracting the profits in the most tax efficient manner and then starting a new PSC). HMRC may be keen to argue that the motivation of the liquidation was to avoid or reduce the payment of income tax.
The Managed Service Company (MSC) legislation
Fourthly, casting a shadow over proceedings is the prospect of HMRC making wider use of the Managed Service Company (MSC) legislation. HMRC has been looking into the affairs of two accountancy service providers (ASPs), arguing that the services they provide to PSCs go beyond that of an accountant: that the ASPs are influencing, if not controlling, how their PSC clients run their businesses.
If HMRC successfully argue their case, then contractors could find that by virtue of their accountant being an MSC provider, they are an MSC. This means that all their income earned whilst a client of those firms is subject to full tax and National Insurance contributions (NIC), resulting in a large and unexpected bill.
There are a number of such contractor accounting specialists in the market, as well as general practitioners with significant contractor portfolios. Is this another route for HMRC to police the market?
What’s next for IR35?
In one form or another, from next April, HMRC’s IR35 spotlight will certainly shine upon PSCs, and it’s wise to be prepared.
If you are challenged by HMRC, you will need to evidence why your engagement falls outside IR35 and demonstrate that you took reasonable care in coming to that decision, particularly if HMRC can successfully argue that your decision was incorrect. There is only one way to achieve that, which is to consider contractual terms of the engagement and the actual working arrangements; these two elements must be in alignment.
If you are an experienced contractor with an in-depth knowledge of IR35, you will know the key factors that determine IR35 status and what to look for in a contract. If not, then it is a small price to pay to have an independent contract review to demonstrate due diligence and avoid a 15%-30% penalty added to the tax and interest if HMRC successfully argue IR35 applies.
Also consider insuring against the investigation’s costs – potentially at least £5,000 and likely more than 10 times that amount if the matter goes to Tribunal.
And those contractors whose engagements are deemed to be outside IR35, there is also the opportunity to insure against the tax loss. It’s also advisable to hold contractor insurance, which can be a positive indicator of being outside IR35.
Regaining control over your working patterns and tax affairs clearly comes with a cost attached. But doing your due diligence, insuring against the expense of a tax enquiry and even protecting your tax position should be seen as the cost of responsible contracting.
Take those responsibilities seriously and you can confidently take full advantage of this unexpected gift!
About the author
Paul Mason is the Head of Tax Partnerships at Markel Tax. Paul joined the Markel Tax team in 1997 and has been closely involved with IR35 since 2001, providing advice on the subject to contractors, end clients and fee-payers.
Paul is a regular speaker on IR35 and works closely with Markel Tax’s investigations specialists to ensure freelancers get the best defence in an IR35 enquiry.
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