Recap of 2022
It is hard to believe that it was only 12 months ago when many medium and large-sized end-hirer organisations were starting to get comfortable with the IR35 off-payroll working rules. For those organisations who applied the IR35 rules fairly, they had undertaken the challenging and arduous task of assessing the employment status of all its limited company contractor population, communicated the status to the contractor and fee-payer in the form of a status determination statement (“SDS”) and established new payroll methods and process for those contractors determined as inside IR35. Not to mention that whilst all this was going on, organisations had to ensure normal business practices and services were not impacted, which was particularly difficult if your business relied heavily on external contractors and consultants.
Once all current contractors had been assessed end-hirers needed to ensure that employment status assessments are performed in advance of any new contractor commencing work and ensuring previous determinations and SDS’s were being reviewed intermittently in order to ensure that they remained up to date and accurate.
As we moved into January 2022, it felt like many end-hirers were getting to grips with the requirements of IR35 and we started to see some businesses reverse their decisions to adopt blanket bans on contractors.
The “soft landing” came to an end in April 2022 which offered a grace period with HMRC committing to not applying penalties on incorrect determinations for the first 12 months unless there was evidence of deliberate non-compliance. Even before the 12-month anniversary of the IR35 off-payroll rules and before the “soft-landing” period had expired, we started to see HMRC commence its compliance activity by initially targeting businesses in the oil and gas and financial services sectors. This involved HMRC writing to businesses asking to arrange a discussion to ascertain what they had done to comply with its new obligations. If at such a point it can be demonstrated that ‘Reasonable Care’ has been met and the off-payroll working rules applied properly, this brought any compliance check to a swift conclusion with HMRC focusing their attention on organisations who have failed to act or not done enough to demonstrate it has met its reasonable care obligation.
Whilst the off-payroll working rules continued to be a divisive topic and many businesses were still lobbying for reform, the impact of the 2021 rules gradually started to reduce.
No one could foresee what the government was about to do next. A change in Prime Minster meant a change in legislation with the then Chancellor, Kwasi Kwarteng, announcing plans to repeal Chapter 10, ITEPA 2003 as of 6th April 2023. This would have the effect of putting the onus back on limited company contractors, to determine their own employment status and ensure the appropriate amount of tax and national insurance contributions (“NIC”) was applied, with end hirer organisations and recruitment agencies no longer bearing such responsibilities.
To say this announcement was met with much jubilation would be an understatement. Contractors and end-hirers alike had hardly finished celebrating by the time a new Prime Minister and Chancellor had been appointed and the proposed changes were brought to a firm halt.
The government’s actions during this period added further uncertainty to a very turbulent marketplace with some commenters believing that the off-payroll working rules were never a long-term strategy which has only led to more organisations failing to comply with the rules.
A notable output from the mini-budget announcement is the focus it put on wider supply chain compliance. End-hirer organisations were fully aware of the employment status of contractors it had engaged and become concerned that those determined as inside IR35, may revert to operating on an outside IR35 basis. End-hirer organisations became concerned with the Criminal Finances Act 2017 which serves to criminalise the failure of businesses to prevent the facilitation of tax evasion and a broader supply chain compliance. As such, we have now been instructed by a number of clients to perform supply chain audits and re-review supplier contracts.
To summarise, it looks like the off-payroll working rules will be around for a least the foreseeable future. It doesn’t make sense to put the onus and tax liability back on contractors as this involves HMRC pursuing individual personal service companies (which takes a number of years) to recoup unpaid tax to the tune of tens of thousands. Whereas with the obligation sitting with end-hirer organisations, HMRC is getting hundreds of thousands of pounds upfront whilst retaining the ability to pursue organisations for non-compliance and unpaid tax, in the millions, as we are currently seeing with the public sector fines. The term minimal effort maximum reward springs to mind.
As we go into 2023, I expect the market to continue to settle. There is talk of CEST being ‘improved’ once again, but questions do remain as to whether such a simplistic automated tool will ever be robust enough to demonstrate that reasonable care is being met. Hopefully, we will continue to see organisations embracing a fair process when it comes to determining IR35 status and organisations who initially implemented blanket bans, start to realise that isn’t the answer. We are actively asking for HMRC to provide more support and guidance and to keep the legislation under review, but whether we see proactive positive changes remains to be seen. The best approach for end-hirer’s to take is to work closely with IR35 specialists. Engaging with external IR35 experts to assess your off-payroll workforce is the most advisable approach to ensure that the reasonable care requirement has been met. By doing so, both contracts and working practices will be considered by independent experts who can provide you with in-depth detail and advice. External IR35 experts are also better placed to carry out refresher reviews and identify changes to working practices which may otherwise go unnoticed. HMRC’s guidance is very clear in that “Seeking the advice of a qualified professional advisor” demonstrates that you have taken reasonable care.
If you would like to speak to us about any points covered in this blog or would like to find out more information on supply chain audits, please get in touch.