Further changes were made to the IR35 Legislation on 17th October 2022, please view the most recent update here.

With so much political fall-out on tax rates following the recent “mini budget”, you might be forgiven if you missed the quite extraordinary news that the IR35/OPW changes introduced in April 2021 will be repealed again from April 2023.

This means that responsibility for IR35 compliance will shift back to individuals and their personal service companies (“PSCs”), rather than their “clients”.

It is true to say that the change to the IR35 legislation introduced to the private sector in April 2021 caused huge disruption, and resulted in a requirement for many organisations who engaged contractors to adopt wholly new processes. However, that is not to say that reversing the change two years on will immediately result in administrative cost savings. Businesses will now no doubt have to change, again, how they contract with, and pay, their contractors. More change. More merry-go-round bureaucratic disruption.

The changes in 2021 resulted, in many cases, in a change of tax status for many contractors. Many contractors who were previously categorised as “arms-length service providers” had their tax status changed so that they were then taxed as “ deemed employees” (i.e. within OPW) going forward with PAYE being applied. Categorising contractors as “employed” (and applying PAYE) was considered the “safe” approach for businesses who engaged contractors post April 2021 (especially where organisations didn’t have the information, or resources, to carry out proper OPW assessments). These changes often resulted in a previously “arm’s-length” contractor’s take home pay either being reduced, or, the contractor re-negotiating their pay rates up at the expense of the client.

Now that the burden of applying the IR35 test will rest, once again, with individual contractors and their PSCs (rather than their “clients”), one wonders if, as a consequence of this further change, a greater proportion of contractors will, again, deem themselves to be “arm’s-length”?  Presumably, a benevolent “employer” who agreed to an increase in contractor rates (so as not to reduce the contractor’s overall net take home pay when they were moved to being taxed by PAYE) will not be made aware as to whether the PSC taxes receipts under IR35 or not after April 2023? The result is that contractors who negotiated an increased rate as a consequence of the IR35 changes back in April 2021, may potentially benefit from a tax windfall if they then re-categorise themselves as “arm’s-length” going forward.

Of course, none of these changes do anything to shed greater clarity on when a contractor should be legitimately be categorised as “employed” or when they should be categorised as “arm’s length” or, where no PSC lies between them, “self employed” for tax purposes. That somewhat opaque test remains the same, with the Government only recently declining the invitation to clarify matters. There still ought to be an assessment that looks at the provision of personal service, control, financial risk, integration etc, which goes beyond just what is stated in the contractor’s contract.  Not to be mistaken with a smoke and mirrors circus act….

It should also be noted that one benefit to some businesses of the repeal of this OPW legislation, where they engage contractors, is that it may result in employer national insurance savings (where contractors revert back to using PSCs).  Another slightly unexpected rabbit from the Chancellor’s hat in his myriad of recent tax changes.

If you would like to discuss how the IR35/OPW legislation will affect your business, please get in touch.

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