Treasury and HMRC respond to IR35 reform repeal pledge being broken

The contractor sector is getting practical over new chancellor Jeremy Hunt’s shock decision to cancel the cancellation of the 2021 and 2017 off-payroll rules.

Since Mr Hunt’s decision on Monday, the focus from contractors affected by those private and public sector rules, respectively, has become laser-like on two issues.

First, who the actual victims, the tangible losers, of IR35 reform repeal being cancelled are.

And second, what the continuance of the frameworks really means.

'Unchanged'

Yesterday, that continuance was highlighted by both HM Treasury and HMRC in comments responding to IR35 reform repeal being rowed back on, made to ContractorUK.

“With or without the reforms, the underlying rules on off-payroll working are unchanged,” began a Treasury spokesperson.

“[Therefore] anyone working like an employee should pay similar tax as someone who is directly employed.”

An HMRC spokesperson said: “We will continue to support contractors and engagers to understand what they need to do, and help them to get their tax right.”

'Extensive IR35 education and support'

While HMRC said much the same after Mini-Budget’s vow to repeal IR35 reform, taxpayers at least now have guidance (on IR35 of 2000), whereas guidance on repeal never emerged.

In February 2022, the NAO found “HMRC did not give public bodies sufficient time to prepare” and in May, the PAC found “the reforms were rushed in by HMRC”.

But yesterday, asked if fresh guidance would be incoming, the HMRC official said: “We delivered an extensive programme of education and support before the reforms took effect.

“And we have continued to adapt our approach to improve compliance with the rules and support organisations to get things right.”

Organisations appear to be among the losers of Mr Hunt’s decision to cancel the cancellation of IR35 reform.

'Forget your money-saving thoughts, end-users'

Addressing end-clients, who before Monday were expecting the burden of deciding IR35 status to shift back to contractors from April 6th 2023, IR35 adviser Kate Cottrell wrote:

“It is ‘as you were.’[So] any thoughts of [your organisation] saving thousands of pounds by cutting onerous business costs of compliance… [are] probably lost for many years to come.”

Sounding aware of the benefits should the burdensome IR35 status decision have shifted back to PSCs and the liability away from end-users and their recruitment partners, is BDO’s John Chaplin.

To those clients who were up for dipping their toes back into B2B contracts from April, Mr Chaplin, clearly a movie buff teased: “Just when you thought it safe to go back in the water!”

'Willingness to reengage PSCs since Mini-Budget 2022'

Kingsbridge IR35 project manager, Ryan Dawson, says that indeed, some outfits which banned PSCs “showed willingness” to reengage them following Mini-Budget vowing repeal.

Compliance specialist Alexander Jackson has seen the same.

“Many businesses [that] blanket banned PSCs had shown optimism about engaging limited company workers post-April.”

Also of Kingsbridge, Mr Jackson continued: “Now all we need to do, is all we can to keep encouraging them that they still can…[partly because] blanket banning is NOT the answer.”

But it’s not just organisations who will potentially go without (because many niche or highly skilled contractors often refuse anything except ‘outside IR35’ roles – the very determination that in light of Mr Hunt’s cancellation decision, once again there will be HMRC penalties for should it be incorrect).

'Outside IR35 if it wasn't for the risk-adverse'

Chartered accountant Helen Christopher of Orange Genie Accountancy says: “The repeal of IR35 reform has been scrapped…[and] this is bad news.

“[That’s particularly the case] for contractors who could genuinely be outside IR35 [if it wasn’t for] risk-adverse end-clients”.

Patrick Joyce at Project Scope agrees, describing the IR35 status decision as now staying with engagers as, “disappointing for contractors who want to pursue their business.”

“Those who ‘auto-blanket’ will continue to do so,” warned Mr Joyce.“[That’s even though] more companies are getting to grips with [IR35 reform].

'All is not lost'

But organisations getting to retain their obligations – obligations they have had for five years in the public sector and 18 months in the private sector, is actually why IR35 advisory Bauer & Cottrell reassures, “all is not lost.”

Matt Fryer, managing director of People 2.0 company Brookson Legal last night explained the rationale to ContractorUK: “At least keeping the current off-payroll working rules takes us back to the position we were in a few weeks ago. It gives us a bit of certainty.”

At Kingsbridge, Mr Jackson spelled out what that certainty looks like ‘on the ground.’ “End clients will CONTINUE to remain responsible for IR35 status, now and beyond April 6 2023.

“Fee-payers will CONTINUE to take on the tax liability for that determination,” he posted.

'We expect little alteration'

Tax dispute firm WTT Consulting sees the same upside to Mr Hunt’s decision to cancel IR35 reform’s cancellation or -- put another way, Mr Hunt’s decision to revert to the status quo.

“The need for an end-user to conduct a status determination exercise, convey this to the transaction chain, and deal with the consequences, remains,” said the firm’s Graham Webber.

“Given that most end-users are already geared up for this, we expect little alteration in how contracts are assessed, awarded or managed.”

'Worrying precedent averted'

And it is ‘alteration,’ with no consultation and at odds with policy procedures that quietly spooked many experts since IR35 reform was announced for repeal, out of the blue.

“To have repealed legislation of this magnitude without a review [or] consultation process would have been unheard of,” says Workwell business manager Stuart Marquis.

“And in some respects, [it] could have established a worrying precedent.”

'Cold light of day'

Chartergates, a law firm confirms: “In the cold light of day, it is largely inconceivable that primary legislation, enacted by parliament, could have been altered or repealed in the fashion suggested during the Mini-Budget. 

“No detailed proposals of how the legislation would be altered, no assessment of the impact of those proposals, no public consultation, no draft legislation and -- if our sources are correct -- no meaningful, if any, prior consultation with HMRC.”

“So the upshot of the last three weeks is that the IR35 legislation is unchanged,” added the firm’s Angela Hall. “And liability for IR35 remains as set out in the 2017 and 2021 amendments.”

'Don't hold your breath for much IR35 detail at the Medium-Term Fiscal Plan'

Bauer & Cottrell agrees, although the status advisory says contractors may learn more at the Medium- Term Fiscal Plan on October 31st.

But probably not much more. “There could be extra details when they publish the OBR forecasts and other documents on Monday week, but once again, my opinion is ‘don’t hold your breath’” says IR35 adviser Ms Cottrell.

A former inspector of taxes for the Revenue, she added : “If nothing has in fact changed – as it appears -- then civil servants will not be busy with ‘new’ guidance or concentrating on a promised IR35 review [made on the campaign trail by now-prime minister Liz Truss]. 

“The reality is this. We are stuck with the OPR rules -- and IR35 for PSCs supplying small companies – unless, and until, parliament agrees otherwise. And even then -- as the last few weeks of this crazy situation have taught us, we need to see it in black and white in the Finance Bill.”

'Foolish'

WTT’s Mr Webber has a similar outlook, saying whoever the chancellor is this month or next, or even at March 2023, he or she “might reintroduce the repeal”.

“But given the recent performance of this [new] administration, that would be a foolish thing to predict,” he wrote on LinkedIn.

“None of the fundamental principles of IR35 have changed. Careful assessment of the role or the job required and working with an end-client to achieve the most efficient means of working -- for all parties.”

'More needs to be done by HMRC'

Yet there is one party which needs to up its game.

Referring to strong criticisms of how it has handled IR35 by numerous parties, ranging from the National Audit Office (NAO) and Public Accounts Committee (PAC) to the House of Lords Finance Bill Sub-Committee and former chancellor Kwasi Kwarteng only last month (‘unnecessarily complex and costly’), Brookson’s Mr Fryer said:  “It is now clear that the government acknowledges the current rules [enforced by HMRC] aren’t working as expected.

“And if the 2017/2021 rules are to stay in place, exactly as they are, more needs to be done by HMRC in terms of education and support for the entire flexible labour market.”