Repeal of IR35 reforms: what does it mean for the self-employed?
- 14 Oct 2022
- Markel Direct
Update: This policy area has been subject to frequent change in recent weeks - as a result, the information in this article is out of date. For the latest on IR35, visit our IR35 hub.
In recent weeks, it’s been announced that the government has decided to repeal the IR35 reforms from 6 April 2023. In this article, Markel IR35 expert, Paul Mason, explains what the repeal means for self-employed contractors and the points they should consider to be prepared.
IR35 reforms scrapped
IR35 Off-payroll working repealed? It’s something that none of us saw coming!
A momentous U-turn, but is it good news for contractors engaged through their Personal Service Companies (PSCs)?
Indeed, 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.”
But control of your own destiny comes with responsibility and liability.
Understanding the IR35 reforms
Firstly, you need to understand IR35, a complex area of tax, where the basis of decision-making rests on creating a hypothetical contract. IR35 determinations are centered 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.
What’s next for IR35 and the self-employed?
From next April, HMRC’s IR35 spotlight will certainly shine on PSCs. Considering this, 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, especially 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. Both of these elements must be in alignment.
If you are an experienced contractor with a strong understanding of IR35, you will understand the key factors determining IR35 status and the things to look for in a contract. If not, it may be worth considering having an independent contract review to avoid a 15%-30% penalty added to the tax and interest if HMRC successfully argue IR35 applies and to show due diligence.
As an IPSE member, you can receive a discounted contract review service. You can learn more about this here.
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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