The last month has been a rollercoaster for organisations grappling with the off-payroll working rules (also known as IR35). Any sense of relief felt by those organisations following the announcement at the mini budget that the rules were being repealed from 6 April 2023, was short lived. Just two weeks later it was announced by the new chancellor, Jeremy Hunt, that the repeal was not going ahead.
The cancellation of the repeal of the off-payroll working rules means that organisations subject to the rules must continue to apply the off-payroll working rules beyond April 2023.
To briefly recap, the off-payroll working rules were introduced in 2017 for public sector organisations, and in 2021 for medium and large private sector organisations. Businesses subject to the rules and using contractors operating through their own companies are responsible for determining if an engagement contract falls inside or outside of IR35. If these contractors are working as if they were employees, and thus inside IR35 rules, they must deduct PAYE and NICs from payments made to the contractor’s company.
The cancellation of the repeal of IR35 means that the time and money spent by organisations implementing systems and processes to comply with the off-payroll working rules is not wasted, but the continuation of these rules presents a long-term ambiguous task and administrative burden for those companies affected.
Central to the struggles experienced by organisations applying the off-payroll working rules is the requirement for the end user of the worker’s services to determine the employment status of the contractor. This is not straightforward. It involves the review of each contractor’s working practices, the contractual wording of the service agreement, and the assessment of these practices against a plethora of status indicators.
The uncertainty around accurately determining employment status for tax is highlighted by the sheer number of cases that have reached the courts. Judges and HMRC have taken different views on the interpretation and importance of certain status indicators, with differing outcomes resulting at the various stages of the process.
HMRC’s tool (the HMRC check employment status for tax, or CEST) to aid an end user organisation in determining employment status is far from perfect. Criticism around the design of the tool includes the placing of an insufficient weighting on contractors who work for other clients and are likely to be in business on their own account. This tool is also not sufficient in assessing all factors; eg, mutuality of obligation. Currently around 20 per cent of cases that use CEST give an undetermined outcome, with no further support provided by HMRC to enable an end user to make the final status determination in such cases.
It is no surprise, then, that many organisations have experienced delays to projects commencing as a result of these rules. This is particularly true where changes in the project scope result in significant resource and time being dedicated to getting the IR35 determination correct. Some organisations have opted to bypass the rules altogether by imposing a blanket ban on the use of contractors. They insist that the contractors are employed by an umbrella company, or they turn to offshore non-UK resident remote contractors to manage their IR35 risk.
Clearly, the government must act by reviewing the off-payroll working rules to make them more user friendly and ensure certainty around the status results. This review should include a consideration of the CEST tool and updates to HMRC guidance to provide more clarity around the rules. This process should take into account the modern and remote working practices that have emerged since the rules were first introduced.
Even better, a clear statutory test of employment status is needed. To limit unintended compliance failings, HMRC should look to provide more clarity on what they consider to be robust systems and what exactly constitutes ‘reasonable care’ for this purpose. Key to this re-evaluation is the need for HMRC to work with sectors that have been most impacted by the rules, thereby enabling the government to understand the practical challenges faced by organisations trying to comply with them.
It appears the off-payroll working rules are here to stay. Organisations subject to the rules will need to navigate them carefully to minimise exposure to penalties and reputational risk.
John Williams is a director at Moore Kingston Smith