Top 10 reasons why IR35 reform repeal isn’t plain sailing for contractors

As the contractor sector and beyond knows by now, on Friday September 23rd 2022, chancellor Kwasi Kwarteng made a very significant announcement about IR35 reform in his Mini-Budget 2022.

But what seems to be lesser known and certainly is being less appreciated than it ought to be, is precisely what he announced, writes tax lawyer Rebecca Seeley Harris, author of CEST Explained and the founder ReLegal Consulting.

Mr Kwarteng announced the government’s intention to repeal the Off-Payroll Working (‘OPW’) rules which currently govern the public sector (since April 6th 2017) and the private sector (since April 6th 2021). These rules, Mr Kwarteng said, will be repealed from April 6th 2023.

However, this promised repeal of the OPW rules -- also known as IR35 reform – has been wrongly reported by many outlets to be ‘The Repeal of IR35,’ which is quite wrong because IR35, the Intermediaries legislation (found at Chapter 8 ITEPA 2003), is what we will all be left with from 06.04.23.

Whereas this announcement by the Liz Truss-led government does seem like good news, and indeed it is a positive development for the organisations that engage contractors (‘clients’), I don’t believe it is going to be plain sailing for contractors. Here are my top 10 reasons why:

1. Off-Payroll Working reforms are in place for another 7 months

The OPW rules contained in Chapter 10 ITEPA 2003, will remain in force until April 6th 2023. And so up until that time, the framework is still very much alive and very much enforceable.

Although for the private sector the announced repeal of the OPW rules means they will only be in place for a total of two years by the times they are revoked, in the public sector, the rules will have been in place for a total of six years (since their April 2017 introduction). Therefore, in both sectors, clients are unlikely to abandon their compliance procedures and processes, partly because HMRC will still be able to investigate any wrongdoing under the OPW framework for potentially up to six years -- if there was ‘carelessness.’

2. It all hinges on the Finance Act

The OPW rules will only come off the statute books if they are contained in the next Finance Act. But we have a very unstable economy at present and the new chancellor’s Mini-Budget which contained the pledge to repeal the OPW rules has not been well received by the markets. So, at the time of writing, I believe anything could happen between now and April 2023 due to the economic volatility and unpopularity of the Mini-Budget, including in quarters which the government is relying on to get its contents passed into law.

3. The devil you know, is still devilish

The Intermediaries legislation (otherwise known as IR35) will replace the OPW rules. 

IR35 has already still been in place since 06.04.21 for those limited company contractors who worked with “small” businesses. And of course it was in place in the private sector up until April 6th 2021. Keep in mind, this is legislation that is so complex and divisive that people complained about it and lobbied against it almost continually for 21 years. So remember that although IR35 seems better than the OPW framework, it is still a significant burden on the contractor.

4. PSC bans. Too long a way back, perhaps

Many organisations simply decided that they wouldn’t work with PSCs anymore as a result of the OPW rules. Often, this decision was not a non-compliant ‘blanket ban’ (i.e. every PSC determined to be inside IR35 without reasonable care taken by the client in that assessment). It was often purely a business decision. As such, these organisations especially those for whom change takes a while to come about, may still be cautious about re-engaging PSCs in the supply chain. My feeling is that it will be market forces that dictate whether organisations with PSC bans in place, start to use PSCs again.

5. Status Determination Statement Amnesty?

At this stage, it is unclear how HMRC will deal with the Status Determination Statement (SDS) that a client has deemed as on-payroll, if the contractor comes back as off-payroll. There should be an amnesty, as there was coming into the OPW rules on previous status determinations. But HMRC has not taken the opportunity (so far) to offer such an amnesty. And some say, the prospects of such an amnesty from a taxman keeping silent on the issue look poor. 

6. Clients won’t necessarily revert to being hands-off

Under the original IR35, there was no liability on the client but, HMRC may try and find a halfway house. From April 6th 2023 however, the contractor will have the liability for the assessment and the tax. So, just as with OPW, it would be advisable for client-organisations to assist the contractor with the IR35 status determination and make sure that measures are taken to ensure compliance.

7. The self-employed anomaly

The OPW legislation does not apply to the self-employed. So, nothing has changed if you are self-employed.

However, amid the ongoing economic turbulence and dissatisfaction at the Mini-Budget, should there be a change of personnel at HM Treasury (N.B. the last chancellor lasted a not-very-grand total of only two months), this could look like an anomaly that needs to be fixed.

8. Umbrella company users -- contractors who are ‘fine as they are’ for the client?

The OPW reforms were instrumental in pushing a lot of contractors into umbrella companies. In my experience, some of these contractors should have clearly been on-payroll but, many wouldn’t have even been given the choice.

Now, with HMRC yet to say anything substantive about IR35 enforcements post-April 6th 2023, the client may feel cautious about changing the status of the contractor from an umbrella company / on-payroll to a PSC outside IR35. That hesitancy could also come about due to employment rights reasons, not just tax. Overall however, there is likely to be a general movement in the contractor market away from umbrellas and back to PSCs.

9. Sticking their oar in

Agencies and clients now have a better awareness of employment status and IR35, so working with them on this opaque subject should hopefully be easier than some years ago. That said, parties which have learnt about OPW may want to demonstrate their grasp of the framework to you. Despite once again being the sole decision-maker of their IR35 status from April 2023, contractors might not take kindly to these suggestions or interventions from others in the supply chain.

10. Contractor assessment process 101

From April 2023, the contractor will be liable for making the assessment of their own status for tax purposes. As and when this repeal is finalised, then the contractor will need to understand the assessment process. For the sector’s many newer contractors, who perhaps have only ever used umbrella companies because they entered contracting under the OPW rules when brollies were widely seen as the default working reaction to the framework, they may find the learning curve around the IR35 assessment process particularly sharp.

Finally, my recommendation: avoid any knee-jerk

These are just ten of the very top reasons why repeal of IR35 reform / OPW rules doesn’t mean it will be plain sailing for contractors between now and April 6th 2023, and beyond.

My recommendation – both to clients I advise but also to ContractorUK readers too -- is to avoid making any keen-jerk reactions. Remember, there should be a full Budget in November 2022 and while it pains me to say it, things may change (again). After all, chancellor Kwarteng moved to repeal the April 2017 and April 2021 IR35 reforms without any consultation which is very unusual. With HMRC no doubt desperate to recoup the incoming billions lost through his pledged action, nasty surprises simply can’t be ruled out.