Changes to ‘off payroll working’ rules

Kwasi Kwarteng’s ‘Plan for growth’ includes a plethora of changes, including changes to IR35, known as ‘off payroll working’. This blog aims to tell you what it is and how the changes are designed to impact you and your business.

What is IR35?

The rules known as ‘IR35’ were introduced in April 2000 in an attempt to prevent tax avoidance through ‘disguised employment’, such as an individual working through a company and extracting the profits in the form of dividends. This could save significant amounts of income tax and National Insurance Contributions, in comparison to someone doing the same work as an employee covered by the PAYE system.

Why new rules?

The intention of the rules was to charge Income Tax and NIC on workers based on the nature of their relationship with the payer of the remuneration, this was irrespective of whether the worker contracts with the engager directly or via a company. If the relationship would be regarded as an employment contract in the absence of the personal service company. Then the contractor’s company (broadly) would have to account for payroll taxes on that income.

The rules have been controversial

Since their introduction and difficult to enforce. So, in an attempt to close perceived loopholes, the government transferred the responsibility for deciding what was ‘equivalent to an employment contract’. From the worker to the engager for public sector bodies in 2017 and larger private sector engagers in 2021.

What are the changes?

The ‘Plan for Growth’ includes the repeal of the 2017 and 2021 changes under the heading ‘taking complexity out of the tax system’. This does not amount to the repeal of IR35 itself; rather, from 6 April 2023. For someone working through a personal service company will once again be responsible for deciding whether they are caught by the rules.

What will these changes mean for you?

The government says that ‘this will free up time and money for businesses that engage contractors, that could be put towards other priorities. The reform also minimises the risk that genuinely self-employed workers are impacted, by the underlying off-payroll rules.’ This measure is costed at just over £1 billion in 2023/24, rising to over £2 billion in 2026/27.

What happens now?

Presumably, HMRC will continue to police the rules as they have since 2000, taking cases to the Tax Tribunals where they consider workers have incorrectly classified themselves as effectively self-employed.

The burden of tax and penalties for getting the decision wrong will shift from the engager back to the personal service company, as several high profile disputes involving media.

Get your business ready

For more information and guidance on IR35, find out more about our Business Tax Team here and how they can help you get ready, or call them on 01903 234094.