Some legal experts are not convinced that IR35 reforms set to be repealed in April 2023 will be set in stone or even come to fruition.
And if they do? According to these same experts, there will be new risks and HMRC enforcement powers contractors hiring companies, umbrellas, accountancy servicing firms and recruitment agencies must be aware of.
Anyone working in the contracting sector could argue that the policy uncertainty over self-employed and Off-Payroll working status is seriously impacting people’s lives, careers, businesses and livelihoods. But it would seem uncertainty is likely to prevail.
In a recent Insights piece by law firm Osborne Clarke’s Workforce Solutions team, it was stated: “We think it more than likely that by the time everyone has got used to these changes the IR35 reforms will be reinstated by a future government and we will all start again. The Grand Old Duke of York would have been proud of the history of tax policy in this area.”
More than one way to come after contractors and end-clients
Osborne Clarke reported that the repeal will affect HMRC’s ability to enforce IR35. However, even if the repeal of the IR35 reforms did go through in April, HMRC won’t suddenly become complacent, which is why the Treasury will use other regimes other than IR35 to counter tax avoidance.
“It may decide that IR35, after the repeal, is not worth trying to enforce on a case-by-case basis for individually small sums against individual contractors,” said the report.
The report continued: “That hassle is why HMRC told the then chancellor eight years ago that the original IR35 was not working, which led to the (soon-to-be-repealed) 2017 and 2021 reforms that allowed HMRC to go after deeper-pocketed staffing companies and end users.
“If it again becomes uneconomic from April 2023 for HMRC to enforce IR35, that may make HMRC turn to other tax legislation to tackle the increase in tax avoidance that seems likely to happen. The Criminal Finances Act (CFA) is a likely first choice. HMRC already routinely raises CFA compliance in large client annual review meetings and flags staffing supply chains as a key risk area.”
The question here is tax avoidance by which individuals? The contractors or the owners of umbrella companies?
How could HMRC use CFA after April in PSC contracting situations?
Osborne Clarke’s Insights piece has stated that the obvious target of CFA enforcement will be any roles that the end client has determined (pre-April) to be inside IR35, or blanket-banned PSCs from filling, but which the end client and staffing company or supplier consultancy allow to be performed by a PSC on a self-employed basis after April.
The above example, according to ti the legal experts, could be deemed to be “turning a blind eye to tax evasion” by the contractor since the contractor and staffing company knew full well that the contractor was inside IR35 and the end user knew full well that by using a PSC model the contractor was treating him/herself as outside IR35.
Otherwise, why would they bother using a PSC model? asks the report.
Freelancers and contractors may find it wise to start from scratch with new clients and iron clade outside IR35 contracts if they want to set up their own PSC/limited company after April 2023.
Unless the end client and others in the supply chain can show that they took reasonable steps to prevent the facilitation of that tax evasion in the supply chain they will have committed a corporate criminal offence under the CFA and be liable for an unlimited fine.
Osborne Clarke Workforce Solutions
The “reasonable steps” that might be needed to avoid this liability will depend on various circumstances, but all in the supply chain would be wise to continue to have some sort of process – in relation to roles that had, perhaps cautiously, been determined as being inside IR35 – of establishing and recording that in fact there were decent grounds for believing they are outside IR35.
This may well look very similar to the current processes in place for assessing the status of PSC contractors and generating a status determination. In many cases, changes may be required to the roles and the way in which clients and staffing companies engage with PSC contractors to render the roles more obviously self-employed if PSC contractors are to be allowed to perform them.
Osborne Clarke Workforce Solutions
HMRC will have eyes on umbrellas, accountancy service companies
The report indicated that specialist accountancy service companies that offer to help contractors set up as PSCs are likely to get heavily involved in helping contractors move back to PSC contracting.
“Many will be expecting their client books to grow aggressively in the next months and, may well have to get involved in substantial referral arrangements with some staffing suppliers even where contractors move from an umbrella company to being advised by an accountancy service provider within the same umbrella group.
“We also expect to see new accountancy services providers appear on the scene ready to make the most of the rapid growth in the need for PSCs and ready to pay substantial referral fees to get the business. It seems inevitable, for example, that some umbrella company providers will feel under pressure to help umbrella workers and sole traders back into PSC contracting arrangements.”
MSC enforcement could be expanded
The report highlighted that HMRC can use the Managed Service Company (MSC) regime enforcement example even if the contractors are, for the purposes of normal employment status tests, genuinely self-employed.
“HMRC can do this because the MSC regime focuses on whether the contractor has been helped with the setting up and running of their PSC company rather than whether they pass or fail employment status tests like the IR35 tests.”
Is this the end of referral fees?
The report noted that contractors under the repealed reforms will likely be encouraged to get their own accountancy support if they have, for example, been working via a recruitment agency or umbrella company and go back to a limited company structure. That said, there have been reports over the years of some staffing companies receiving referral fees from umbrella companies and accountancy services companies. If these fees are no longer on the table, new means of profit chasing could be on the cards. What shape or form that will take is yet to be seen.
Many less sophisticated staffing companies may not be aware of the risks of making these referrals and receiving referral fees, said the report.
“Alternatively, they may be hoping that HMRC will give up enforcing MSC as well as IR35 but we have seen nothing to suggest that HMRC won’t use MSC, especially if it sees a major increase in the use of PSCs,” said the report.
There are also potential risks ahead, said the report. Specifically, the logistical challenge and inconvenience for staffing companies of having to process and pay large numbers of PSC contractors’ invoices.
Staffing companies will need to be careful about introducing any arrangement that relies on an intermediary to invoice and receive payment on behalf of multiple PSC contractors; this could in itself give rise to an MSC risk. Self-billing arrangements will also need to be set up carefully.
Osborne Clarke Workforce Solutions
Will some umbrellas take MSC risk?
The authors of the report believe that in the short term there will be a big reduction in higher-paid umbrella workers. This is because many contractors moved to umbrella models in 2017 and 2021 when the different stages of the IR35 reforms came into force, and they seem likely to want to leave umbrella work and return to PSC contracting.
The authors said:
“That leaves umbrella company owners with a decision about whether they want to move into or increase accountancy service provision hoping that HMRC will not attack them under the MSC regime. This is a classic dilemma in the staffing supply chain: act cautiously and lose market share, or take a risk and make hay while the sun shines.
“We imagine that more sophisticated umbrella companies will, if they do offer accountancy services to PSCs, be taking urgent steps to minimise MSC risk.”
Read the full report here.
I’d be very interested to see an article on how banks (and possibly insurance companies) have benefited from not having to payout VAT to contractors working inside IR35. Given they cannot claim that VAT from the government, how much has the government VAT revenue gone down under IR35 and does this offset tax gains elsewhere?
As a contractor I worry that the banks might throw weight (and money) behind keeping the IR35 format, because that would be in their best interest.
> As a contractor I worry
If the financials of VAT were so, then why would such companies have structured their resourcing outside IR35 in the first place? i.e. pre-2021. It would make no sense. So I don’t concur this is a major risk. There are also intangible benefits too for organisations using outside arrangements that are risk reducing. I don’t believe the previous situation arose merely de facto.
The biggest issue I have with IR35 is that it will not allow expenses to be removed before tax is calculated, or allow for tax to be reclaimed on expenses incurred.
I’m currently spending in excess of 1500 a month in travel and accommodation as I travel to different sites.
I have a choice; work outside IR35 or only take local roles. Part of my business is the willingness to travel to places where other contractors won’t – but since IR35 that excludes any government roles.
The knock on effect of IR35 on the government is more than a tax calculation, they need to consider worker supply.
Let’s not get too carried away about this potential repeal.
Prior to change in responsibility for determination, there had been a series of anti-contractor steps made. Expenses was one but far less impactful overall than the changes to dividends or flat rate VAT. These were all negative for contractors running into many thousands at least per annum for small businesses. HMRC has been on the warpath for the best part of a decade. And the contractor community on the back foot. It’s long time the tide turned and HMRC outed for the damaging and ineffective policies they’ve been inflicting with such zeal. HMRC claim off payroll reform has netted over a billion pounds with no downside but we only have their word on that. No conflict of interest. No way. Definitely not. Time there was an independent audit or better still, a public inquiry.
IR35 is a drag on workforce participation, umbrella companies cannot fit the self employment mould, I refused to use them until this month when the experiment provided an opportunity for useful experience. I will never entertain an inside IR35 contract again, financially uninteresting, inflexible low budget accounting software sucks, nothing works, communication is hindered the umbrella has no idea about the intricacies of the contract, criminal pensions culture just headaches every week. Its a tax collection device for the government, very definition of a parasite… disavow umbrellas, accept weaker control over individuals cut government spending build a better more productive society.
The CFA issue would apply only at one point in time (April 2023) and only to contractors who continued in a contract which was inside up to April, then the contractor continues in the role but they deem it to be outside.
Furthermore, this statement shows scant understanding of how it works in the old rules. The end client would be unaware of the contractor’s status since the monies are always paid to a Ltd Co, it’s then up to the contractor to declare their status and pay the taxes accordingly. The end client knows nothing about what happens to the monies after the Ltd Co receives them and has no way to do so, even if they wanted to (which they don’t – why should they do HMRC’s work for them?). There’s nothing illegal in that.
I’m constantly amazed by the amount of absolute twaddle written about IR35 by so-called “experts” (many of whom have a vested interest in IR35 continuing – usually because their business sells services related to IR35).
Just to add/clarify – an umbrella company is not the only way to operate inside IR35 contracts. Many people simply ran a Ltd Co and paid the taxes associated with being inside – so the client only sees a Ltd Co as an entity it pays, not what taxes that Ltd Co pays.
To avoid constantly chopping and changing of status, many (most?) would simply declare themselves to be outside but pay the taxes due inside for any contracts where that was appropriate. Such companies would not offer much of a target for HMRC since they were paying the inside-IR35 level of taxes anyway.