To the surprise of all, Kwasi Kwarteng proposed a complete repeal of the changes from April 2023, a policy almost as short-lived as Truss’ premiership.
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HR teams and their suppliers felt a mix of emotions at each stage of this double u-turn. On one hand, we’ve all invested huge amounts of time and effort managing the changes over the last few years.
On the other, removing responsibility for determining the tax status of contractors had the potential to make it far easier access to flexible resources.
So where do we stand now? Are more changes likely under the next prime minister? What can be done to work with, or improve on, the current rules?
A sigh of relief
IR35 changes, and its subsequent repeal, have evoked strong and emotional responses. For HR professionals currently responsible for IR35, the mini-budget announcement brought relief, ending the need to determine and manage the employment status of all contractors for tax purposes.
Reverting IR35 responsibility to the contractor would have helped to alleviate administrative burden, while removing the financial risk of tax liabilities from inaccurate determinations and the reputational risk of non-compliance, some of which might be hidden in the supply chain.
Short-lived
The latest u-turn returns responsibility for making accurate status determination statements (SDSs) with the end-hirer.
This also means that the hiring business is responsible for ensuring correct tax and national insurance (NI) contributions are paid and that the organisation is liable for any unpaid tax liabilities if found non-compliant.
The current system is not working
The initial repeal of the changes was the government admitting that the legislation is not working as expected.
As set out in the government's Growth Plan 2022, the repeal aimed to "free up time and money for businesses that engage contractors, that could be put towards other priorities" and also "minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules".
From these statements it is evident that the government views the current rules as too time-consuming and resource heavy for businesses, and that contractors may be receiving unfair status determinations.
What are the problems with IR35?
It is apparent that there are challenges with the current IR35 legislation that need to be addressed, and beyond the legislation itself, the flexible supply chain is also facing broader compliance issues that need to be rectified to support the overall growth of the contractor workforce.
There are multiple routes to determine the tax status of contractors, including online tools such as CEST but as ever, a tool is only as helpful as the person using it.
Added to this is complexity of the legislation that means approximately 20% of contractors are unable to be classified by CEST and need to be audited by a specialist.
To demonstrate the ‘reasonable care’ stipulated by the legislation, organisations need to take the time to create their own status determinations for all in scope workers with specialist support and guidance.
De-risking the broader supply chain
The current IR35 rules also place responsibility on businesses at the top of the flexible supply chain to ensure that all parties are following the rules. For example, if an SDS is completed further down the supply chain, it is important to make sure it is accurate.
As if found to be wrong, HMRC could look further up the supply chain to recoup the unpaid tax and NI.
This is particularly important for those with long supply chains with outsourced service provision. These complex talent networks can hide risk especially when a statement of works (SOW) is used as an IR35 get-out-clause.
Falling foul of this most recently was HS2, which is anticipating a £9.5 million IR35-related tax bill, as the agreement between HS2 and its consultancy did not reflect a genuine managed service.
This effectively moved the responsibility for IR35 determinations and in turn, tax liability, up the supply chain – in this case to HS2.
To de-risk the supply chain, organisations need to look beyond the SDS and gain visibility of their partners (agencies, umbrella companies, payroll providers) compliance. Supply chain due diligence is essential to assuring labour supply chains and ensuring compliance with the Criminal Finances Act. Failure to do so can lead to significant legal, financial and reputational risks to business.
Key to this is working with reputable partners. The umbrella market has been in the headlines recently regarding non-compliant activity carried out by a few organisations which tar the rest of the industry.
Offering contractors the ability to ‘take home more pay’ through tax avoidance schemes or mismanaging holiday pay, means that contractors can miss out on their pay and put the hiring business at risk of being deemed non-compliant.
What’s next?
With the government expecting to save £1 billion to £2 billion by keeping the existing legislation in place and the IMF strongly indicating that the Treasury must rebalance the books through taxation, we expect HMRC will be proactively seeking to recoup tax liabilities in the years to come.
IR35 is a complex legislation and navigating it and wider supply chain compliance requires specialist knowledge, insight and ongoing support. For this reason, it’s vital that organisations seek a compliant IR35 solution now to ensure that they mitigate risks throughout their supply chain and be confident that further down the line they will be compliant should HMRC begin an investigation.
Matt Fryer is managing director of Brookson Group
