IR35: this last (cruel) year under the off-payroll rules, in review

It’s been an eventful 12 months on the IR35 front and while I’m sure I said this last year too, the to-ing and fro-ing on the legislation in 2022 will go down in history, writes Seb Maley, CEO of Qdos.

On the face of it, this year is likely to be remembered by off-payroll contractors for many of the wrong reasons.

Having been told that the off-payroll working rules were to be repealed – only for the government to needlessly U-turn that repeal just a few weeks later – it’s been another frustrating year for contractors, as far as IR35 is concerned.

With the rules of April 6th 2017 and April 6th 2021 now set to stay because of that flip-flopping, let’s brave a look back on the repeal, and consider other defining IR35 moments of 2022.

Truss promises IR35 review

Following Boris Johnson’s resignation as prime minister, Liz Truss entered the race to replace him, promising to review IR35 if successful.

Now, as many of you will know, there have been countless reviews of IR35 but very little change resulting from them. However, Truss’s vow to scrutinise these rules was at least seen as a step in the right direction.

Kwarteng repeals IR35 reform

Having secured 57% of the Conservative Party member votes, Truss won the keys to Number 10.

She moved quickly to hold the now infamous Mini-Budget 2022, in which her chancellor -- Kwasi Kwarteng -- unveiled £43billion-worth of tax cuts and changes – one of which was the surprising, but most welcome news that IR35 reform was to be repealed from April 2023.

Needless to say, contractors were looking to the future with confidence.

Mini-Budget U-turns

These largely unfunded tax cuts unveiled by the soon-to-be-sacked Kwarteng saw the markets crash and the pound plummet in value.

But while it’s unlikely that the IR35 reform repeal had much to do with this, it was unfairly swallowed up in the raft of U-turns announced by Kwarteng’s successor, Jeremy Hunt.

Off-payroll working rules remain

Last month’s Autumn Statement 2022, which was brought forward due to the economic uncertainty resulting from Liz Truss’s short tenure as PM, confirmed that the off-payroll working rules will remain in place.

So, from a contractor perspective, it’s a case of ‘as you were.’ Public sector bodies, along with medium and large private sector firms, remain responsible for determining IR35 status, with the fee-paying party liable for non-compliance.

The saga outlined above made the headlines in 2022 – and rightly so – but there were several other important developments, including:

HMRC to ramp up compliance activity

Tax hikes and tax freezes announced in the Autumn Statement showed how desperate the government is to increase tax receipts.

But buried in chancellor Hunt’s statement was the news that HMRC will receive a further £79million  – on top of the £292m in last year’s Budget – to police tax compliance.

With this in mind – and given contractors can still be investigated by HMRC regarding contracts which were completed prior to IR35 reform (2017 in the public sector and 2021 in the private sector), protection against IR35 remains essential.

Off-payroll expected to raise £2bn

It’s also worth pointing out that the government hopes to raise over £2bn by 2028 through the off-payroll working rules.

It therefore shouldn’t come as a surprise to hear that HMRC has been busy in recent months, enquiring into the IR35 compliance of many businesses – whether in the financial services sector, energy space or technology industry.

Government departments hit with £263m bill

Earlier this year, it came to light that the various government departments have been issued, collectively, with £263m worth of IR35 bills. That’s because, using the taxman’s own IR35 assessment tool CEST, the departments misapplied the rules.

Now, HMRC handing a government department a multi-million-pound tax bill is quite different to a private sector business receiving one. Even so, it has highlighted the importance to organisations of ensuring their compliance going forward.

CEST’s flaws highlighted (yet again)

A word more, if I may, about HMRC’s fundamentally flawed IR35 tool, which was a key point in a damning report into IR35, produced by the Public Accounts Committee (PAC) in the Spring.

CEST has received widespread criticism throughout 2022, whether from the PAC, the House of Lords or, more recently, the Administrative Burdens Advisory Board (ABAB), which described the tool as “not sufficiently robust”, among other things. Contractors are well aware of CEST’s failings, though – which will continue to into 2023, and beyond.

My final thought…

Reflecting on 2022, it’s been a challenging year for contractors, whose hopes of IR35 reform being repealed were on the verge of materialising before being cruelly, cruelly dashed. Hardly with notice, hardly with much explanation from officialdom.

However, as we look ahead to new year 2023, there is reason for optimism and something for contractors to hold onto.

While far too many businesses still insist on a risk-averse approach to IR35, thousands of organisations are now carrying out fair, well-informed IR35 determinations which allow genuinely self-employed contractors to operate outside the scope of this controversial legislation.