The recent announcement at the “mini-Budget” to reverse the changes to the IR35 rules bring the legislation back to where it was before 6 April 2017.
If this is enacted as intended, 6 April 2023, where any business engages with a worker through an intermediary entity, it is the requirement of the intermediary entity (generally a personal services company or PSC) to determine the employment status of the worker, and calculate tax accordingly.
Many businesses, who had struggled with the equivocal nature of the employment status tests, greeted the announcement with relief. However it is worth remembering that while the changes do mitigate business’ PAYE and National Insurance (NI) exposure, and the administrative burden of making employment status assessments, there are other considerations.
For example, the Criminal Finances Act 2017 introduced the corporate criminal offence (CCO) of failing to prevent the facilitation of tax evasion. Under the CCO regime a business can be held criminally responsible where those associated with it are involved in the facilitation of tax evasion, unless it can show that it has reasonable prevention procedures in place.
CCO could be in point in the IR35 context should a contractor or an agent, for example, propose an arrangement intended to avoid payment of employer NI contributions. It will be important for the business to have appropriate procedures in place to identify this risk and to address it effectively. And so its policies, due diligence and approvals procedures should raise it as a "red flag" and the business should ensure that employees who need to know are given appropriate guidance and training. Furthermore, and aside from CCO, businesses will always want to keep wider reputational considerations in mind, especially where a marketed tax solution has been suggested.
Other key points of note, that are often overlooked, in relation to the recent IR35 announcement include:
- the reversal does not change business’ responsibilities to assess employment status if a contractor does not engage through an intermediary entity (i.e. as a sole trader);
- the “off-payroll working” rules continue to apply for the period 6 April 2021* to 6 April 2023, and HMRC may yet investigate working arrangement for this period; and
- HMRC had previously stated that it would not use employment status assessments to enquire in to prior years. Given the change in circumstances, contractors may not be able to continue to rely on this undertaking.
*(from 6 April 2017 for public sector bodies).