17th October saw the newly appointed Chancellor of the Exchequer, Jeremy Hunt, issuing an emergency statement reversing almost all the tax measures outlined previously in the mini-budget. This included the repeal of the Off-Payroll Working Rules (IR35), meaning end clients remain responsible and liable for determining the employment status for tax of PSCs.
The repeal would have put an end to the 2017 public and 2021 private reforms which the majority of end-clients found disruptive to business and left many PSCs feeling that their self-employment status was being attacked due to uninformed decisions, bringing a stale mate to the contingent workforce market.
Whilst the repeal was generally perceived as a good measure, it is worth noting that if it had gone ahead, HMRC would have had a definitive period to contact end-clients regarding the employment status decisions made within that timeframe. It would have also meant from April 2023, whilst the decision and liability would technically sit with the PSC, many end-clients having implemented strong IR35 processes and procedures and would not wish to remove those completely, meaning there would need to be a collaborative approach to determining a status if the PSC wished to supply their service.
On the other end of the spectrum, some end-clients may also have wished to take the decision to reverse any “inside” determinations and allow those affected to then switch to a PSC mechanism. In my opinion, this would have been short sighted. The end-client would essentially have confirmed that for a period, the PSC was treated as an employee and if the working practices hadn’t changed after the switch, HMRC would be able to clearly demonstrate that they continue to be treated as an employee. This would have large tax implications on the PSC and transfer of debt liability/criminal finances act ramifications may have made its way back up the chain to the end-client, meaning that both parties would be in some way liable for this short-sighted move.
Yesterday, BBC News reported The Chancellor stated “savings of £32bn would be made by 2026-27 by some of the repeals" with IR35 included and that HMRC expect that £2bn could be raised by this specific reversal alone meaning that not only do they clearly anticipate a large amount to be generated from repealing the repeal but at least within the current government, IR35 is not going anywhere any time soon.
Whilst a large majority of end-clients have a solid IR35 process in place, we are aware of many within the construction and rail sector who feel that HMRC are understaffed, underfunded, and are concentrating on other areas. It is important to remember that HMRC will now be under pressure from the Government to ensure that repealing the repeal is seen as a positive move. HMRC have also ramped up their efforts regarding tax investigations, recruiting new officers to carry out checks.
Over the next 5 years, HMRC will look to employ 1,300 more staff to improve collection, utilising new powers given to them by the previous Chancellor of the Exchequer, Rishi Sunak, helping them to extract tax from harder-to-reach sectors.
This plan has clearly been demonstrated as earlier this year, HS2 published its annual report and accounts for 2021-2022, admitting that they had set aside £9.5m for getting tax status determinations wrong under IR35 rules, utilising HMRC’s Check Employment Status for Tax tool, CEST.
It is no secret that historically HMRC have looked unfavorably upon the construction and rail sectors. HMRC believes tax avoidance in construction is more common than ever and the above affirms that they now have greater powers to tackle it.
If you are an end-client who has been laissez-faire with your approach to IR35, it is not too late to put a process in place. For further information on how Stonebridge could assist, please contact firstname.lastname@example.org.