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The government has announced plans to repeal the 2017 and 2021 IR35 legislation for off-payroll workers at a projected cost of £6.2bn over the next four tax years.
Under the 2017/2021 IR35 rules, engagers had to decide whether individuals operating via personal service companies (PSC) should be treated as employees or as self-employed for tax purposes and end clients or agencies had to operate PAYE and National Insurance accordingly.
The reversal of the 2017/2021 rules will mean that the compliance obligation to assess employment status and operate PAYE will move from current end client engagers/fee payers, back to individuals operating via personal service companies (PSC).
The news will come as a huge surprise to most organisations, many of which have spent significant amounts of time preparing for and adopting the 2017 and 2021 rules changes.
Organisations in the Public Sector and medium and large employers who engage off-payroll labour.
The changes will take effect from 6 April 2023. HMRC have indicated that the new rules will apply where services are provided from 6 April 2023 and the old rules continue to apply for services provided until 5 April 2023, irrespective of when they are invoiced or paid for.
In the long term, businesses are likely to welcome the shift of the administrative burden away from engagers of labour. However, in the short term, there are many challenges to transitioning the policies that businesses have implemented over the last few years.
Most organisations will need to revisit their strategy on the use of the off-payroll workforce. Those that have moved PSC engagements from their supply chain to PAYE alternatives will now need to decide on whether to continue to operate those PAYE models or whether to revert back to making gross payments to PSCs.
This will require careful planning and consideration. Commercial pressure based on existing/expected talent acquisition challenges will be a key driver. The businesses that decide to unwind their new PAYE alternative models will need to consider the timing and approach for any change, for example whether to push forward with a unilateral reversion or make any change optional for the individual with the ability to continue with a PAYE alternative, if preferred. However, any mixed approach may also give rise to the potential for allegations of discriminatory or unfair treatment, where contractors undertaking the same services are engaged in different ways and on different terms (including rates of pay).
Where previous employment status determinations have been issued on the basis of an employment relationship (or ‘inside IR35’), businesses will also need to pay careful attention to the Corporate Criminal Offence (CCO) rules (for potential failures to prevent the facilitation of tax evasion). Simply re-engaging contractors after 6 April 2023 as ‘self-employed’ may pose a risk under the CCO regime. Some organisations may also be cautious of unwinding any engagements in view of potential reputational risk if contractors ultimately are found to have taken a non-compliant position moving forward, even where there is not a CCO breach.