Government’s IR35 consultation: what do employers need to know?

With HMRC considering more changes to off-payroll legislation, People Management asks legal and tax experts which issues this could solve and what will likely remain unaddressed

Credit: Mike Kemp / Contributor

The government is launching a consultation on off-payroll legislation (IR35) which could make it possible for HM Revenue and Customs (HMRC) to account for taxes already paid by an individual and/or their intermediary when calculating the ‘pay as you earn’ (PAYE) liability due.

While the government action has been labelled as a consultation, Dave Chaplin, chief executive of IR35 Shield, says the proposed changes will likely become the law: “The short consultation window of only eight weeks, followed by a response later this year, is a clear signal that the fix will be happening in the next finance bill of 2024.”

What would the changes mean?

Upon a successful consultation, the proposed solution would mean that the liability for income tax and national insurance contributions (NICs) would be shared between the organisation and the worker, and would be calculated by estimating a set-off for tax and NICs already paid by the worker and their intermediary.

Seb Maley, chief executive of Qdos, calls the proposed changes “potentially game changing”, adding that the double taxation of IR35 under the off-payroll rules is a “massive problem”. “HMRC doesn’t offset the tax already paid by a contractor when handing a business a tax bill. Put differently, it means HMRC collects much more than it should,” he says – an oversight he describes as “morally wrong”.

Meanwhile, Matt Fryer, managing director of Brookson Group, says that, in its current form, “the double taxation of IR35 gives needlessly risk-averse businesses another reason not to engage contractors – because if they’re found to be non-compliant, HMRC will over tax them”.

“The positive news for end hirers is that this consultation may result in a significant reduction in the amount of tax that is due, should an IR35 status assessment be successfully challenged by HMRC,” he explains.

Similarly, Susan Ball, employment tax partner at RSM UK, and president of the Chartered Institute of Taxation, sees the consultation as “welcome news, and long overdue, as the off-payroll working IR35 rules have been causing headaches for workers and hiring organisations for years now”.

However, she points out that, even if implemented, “the new rules will not come into force until April 2024”, which means that some “hiring organisations may be tempted to drag their heels” with any HMRC compliance checks in the meantime.

“Typically, a case can take 18-21 months to conclude, and we may see organisations procrastinating over any HMRC compliance checks in the hope that they can take advantage of the new rules when they are introduced,” Ball says.

What do employers need to consider?

While the proposed changes are being considered, Fryer says businesses working with contractors and freelancers might benefit from some preparation to “ensure that their hiring systems and processes are robust now, to avoid significant tax bills further down the line”.

On a similar note, Kate Underwood, managing director of Kate Underwood HR and Training, warns that the potential changes in the consultation present “a range of challenges for businesses” with the increased regulatory burden, especially for larger companies, possibly resulting in significant costs.

For this reason, she says companies will need to invest more resources in gathering and reporting data on their gender pay gap and other metrics, and may even need to restructure their governance processes to incorporate more employee representation, which could involve “significant changes in corporate culture and decision making”.

What are the caveats?

Despite the generally positive reception of the government consultation, experts say there is still a lot to think about.

Tania Bowers, global public policy director at APSCo, which was involved with HMRC in the development of the proposal, and member of the IR35 Forum, welcomes the idea, but remains “firm in [the] belief that, even with this offset, the rules as they are currently written are not fit for purpose in the modern world of work”.

“Given the level of off-payroll receipts reported by the Office for Budget Responsibility last month, it is highly likely that many genuinely self-employed professionals are being forced to work via payroll because of clients’ over-cautious approach of assessing assignments as ‘inside IR35’,” she says, adding there is a need for greater clarity around the definitions of employment and accommodations required to support the highly skilled flexible labour market in a fair way.

“As it is currently defined, off-payroll legislation is, in our view, unsatisfactory. There is a lack of clarity around highly skilled self employment in particular, leading to recruitment firms having the uncomfortable role of being the deemed employer, while not being responsible for the employment status decision,” Bowers explains, but she “remains adamant that off-payroll needs a reform – something that we hope will be factored in as a follow up to the offset mechanism”.

Bradley Lay, chief executive of Bradley Lay, expresses concern that the proposed changes will only add to the “bureaucratic burden” of IR35, making it even harder for small businesses to compete with larger companies as they “often lack the resources to comply with complex tax rules”.

For this reason, he believes the government should be considering the impact on these companies, and “taking action to support small businesses through this difficult period, or risk losing ‘the engine of the UK economy’”.