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The April 2023 IR35 Reform: What does it mean for UK businesses, employees, & contractors?

The UK’s IR35 regulations are changing once more. Here’s everything you need to know.

October 4, 2022 5 mins read

Update: Since publication, the decision to repeal IR35 changes in April 2023 has been revoked. This means that employers will continue to take responsibility for categorizing the status of contractors. You can read more details about what the IR35 entails in our previous article.

On September 23 the UK Government announced their mini-budget. And in a surprising twist, IR35 changes (“off-payroll working rules”) will be repealed from April 6, 2023. This announcement has been widely welcomed by independent contractors and businesses alike.

This comes after previous changes to the law caused major disruption to the UK’s flexible labor market, with many businesses - including multiple government departments - incapable of ensuring their compliance. From April 2023, it will once again be contractors (and not the business or end client footing their bill) who are responsible for determining their own IR35 status.

When Does IR35 Apply?

IR35 applies when an individual personally provides services to their client through an intermediary, usually a personal service company (PSC). If a PSC wasn’t involved, the client-contractor relationship would simply become an employer-employee relationship. As a result, payment to the individual would be processed through payroll and subject to employment income tax and national insurance contributions.

The 2017 and 2021 reforms shifted the responsibility for determining IR35 status away from the individual and onto the end client. The end client also had the burden of operating PAYE and collecting national insurance contributions.

From April 6, 2023, individuals providing services through a PSC will be responsible for determining their own employment status and paying the right amount of tax and national insurance contributions themselves. The government hopes this reform will free up time and money for businesses engaging contractors and minimize the risk that genuinely self-employed individuals are affected by the rules.

So Is This Good News for Contractors And the Businesses That Use Them?

Yes, at face value. Businesses will once again be able to hire contractors via tax-efficient PSCs without risk of non-compliance. Until April 2023, businesses and individuals risk liability if the PSC individual is not really self-employed, which is very difficult to be sure of. As a result, lots of businesses stopped engaging PSCs because of all the administrative red tape. So contractors will see this repeal as good news too because they can once again use PSCs again to increase their take-home pay.

What’s the Catch?

However, like most things, this situation isn’t as straightforward as it may seem at first glance. So, contrary to expectation, businesses and individuals might not actually race back to using PSCs. Here’s why.

It’s Risky for Contractors

Some individuals might find themselves stuck inside IR35, making it hard to return to using PSCs. In April 2023, contractors will have to follow the old rules in the Income Tax (Earnings and Pensions) Act (ITEPA). Contractors will become responsible for determining their own status and filing tax returns. Pre-2017, it was a huge hassle for HMRC to pursue individuals whose status it did not agree with, with the value of contractors’ tax recovered being less than the legal costs of chasing it down. That’s why the new regime made businesses liable for the tax and compliance. But existing HMRC status determinations might linger beyond April 2023. For a couple of years it might be easier for HMRC to pursue contractors because businesses using contractors made “status determination statements'' under the 2021 regime. If contractors receive IR35 assessments relating to those statements it might be hard for them to create a defense, and there are severe penalties for inadvertently or deliberately misleading HMRC. Contractors and businesses will need to do a lot of planning to minimize this risk.

It’s Still Risky for Businesses

Some businesses might be worried about potential criminal liability. UK companies are required by the Criminal Finances Act 2017 to prevent the facilitation of tax evasion in their supply chains. If they fail, they face unlimited fines and corporate criminal prosecution.

A key reason contractors use PSCs is because they minimize tax. So what happens if, pre-2023, an end client determined that a role fell inside IR35 and therefore couldn’t be done by a contractor using a PSC, but post-2023 the same contractor makes a different determination and is hired for the same role using a PSC? Would HMRC use this as evidence that the end client and contractor are hiding their true tax status? By switching to a contractor-PSC model for the same role, would the end client be failing to prevent the facilitation of tax evasion? It’s hard to predict what HMRC’s enforcement appetite will be, and end clients will be justifiably nervous about potential criminal liability.

It’s Harder to Set up PSCs

It might not be as easy to set up a PSC as it used to be. Some contractors will be able to use their old PSC but many PSCs were set up by cost-efficient online accounting businesses, many of which are now under scrutiny. HMRC is using 2007 managed service company legislation to make all contractors who, in its opinion, used a specialist provider to create a PSC liable for employment taxes, even where the contractors are genuinely self-employed. HMRC can do this because the 2007 legislation considers whether the contractor has been helped with running their PSC instead of whether they pass employment status tests like the IR35 test.

There Are Better (& Simpler) Ways to Attract Top Talent

Lots of businesses couldn’t be confident of navigating the 2017 and 2021 rules and ensuring compliance so stopped using PSCs altogether. Businesses used to use the contractor-PSC model to attract top talent but post-COVID-19, remote work using EOR and PEO arrangements has made it easier to access and retain top talent from further afield, with less compliance risk.

Employment Provides Greater Stability for Workers

The recession and cost of living crisis create competing objectives for businesses and contractors. Whereas businesses might be keen to use IR35 to minimize their own costs, contractors might forgo higher take-home pay in favor of the increased security and certainty of being employed.

What Should Businesses & Contractors Do Before April 2023?

Not a lot. The repeal will not be retrospective so the 2017 (public sector) and 2021 (private sector) rules will apply until April 6, 2023. If you’re a business, you should start planning for projects using contractors that straddle this date.

In the meantime, businesses must follow the 2021 changes, meaning many will struggle to justify using contractors for fear of non-compliance now and in the transition period.

Thankfully, if you want to hire top talent from across the globe, you don't need to put your business at risk by relying on contractors. Instead, you can enjoy all the benefits of a global talent pool hassle-free by using an Employer of Record (EOR) like Omnipresent. EORs employ international talent on your behalf, taking care of all the associated compliance and payroll burden. That way you can hire whoever you want, wherever you want on a permanent basis quickly and compliantly.

Omnipresent’s EOR service combines tech smarts and always-on expert support so ambitious companies like yours can build the best teams on earth. If you’d like to know more, get in touch for a free consultation.

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