IR35 in 2024 be like this for off-payroll working contractors…

2023 is now over – and it feels like it went in a flash. Almost a year ago, the contractor sector endured a rollercoaster of emotions, from the pending repeal of IR35 reform in September to the reinstatement of those divisive off-payroll working rules the following month in October. 

In the subsequent 2023-24 tax year, we saw HMRC step up its IR35 compliance activity, writes Seb Maley, the chief executive of IR35 contract review firm Qdos.

The tax department opened Off-Payroll Working (OPW) checks at will into businesses, and it aggressively pursued high-profile freelancers under the ‘old’ IR35 legislation (of 2000). Away from the headlines, HMRC also went after many other contractor limited companies for perceived non-compliance with IR35. And it must be said, not entirely successfully.

How many organisations is HMRC investigating for IR35/OPW/status compliance?

We’ve seen this pursuit first-hand, ourselves.

In fact, on OPW alone, we’re currently supporting 17 businesses through ongoing IR35 checks by the Revenue -- perhaps a sign of things to come in 2024.

With this increased activity, we’ve uncovered some new trends which readers of ContractorUK would be wise to understand if the best predictor of the taxman’s future behaviour and activities is his past conduct and performance.

Control is being ratcheted up – with HMRC widening what ‘Control’ means

When scrutinising compliance among businesses, HMRC is beginning to home in on working practices.

Control, in particular, is under greater scrutiny, and its scope seems to be widening, too.

Rather than looking at the ‘typical’ elements of control, HMRC is digging deeper, investigating non-contract documents that detail contractor responsibilities, including policies an end-client may have in place – IT or security policies, for example – that a contractor must follow.

This is a developing area and worth being aware of, as it would seem that adherence to policies which traditionally would be unlikely to be considered indicative of control but may potentially contribute to your contract being deemed inside IR35 by HMRC, are increasingly turning inspectors’ heads.

IR35 status reassessments, a red flag to the Revenue if they recur?  

At the tail end of 2023, we saw HMRC looking for evidence of regular IR35 reassessments being carried out by businesses. The thinking behind this is that the longer a contractor is engaged, the more likely the working practices can evolve.

As such, if you’ve been working with an end-client for a considerable period as an off-payroll or limited company contractor, it’s in your best interests to suggest a reassessment.

Ideally, this should happen regularly; every six months is about right.

With this in mind, it’s worth highlighting this risk to clients, who should be keen to conduct a reassessment. 

Poor comprehension by the taxman of his own OPW rules

Despite creating the legislation and being responsible for enforcing compliance, HMRC itself has so far demonstrated a poor grasp of the off-payroll working rules.

This is compounded by the way the tax authority has conducted its checks.

‘Haphazard’ is probably the best word to describe its approach. Based on the 17 OPW checks we’ve been involved in on the eve of 2024, there seems to be no coherent formula, no structure.

Perhaps it’s unsurprising these checks remain open as long as they do.

Off-payroll working checks are unquestionably open for longer

And these potentially disruptive checks do seem to be dragging on for longer.

In fact, at the time of writing, we still have a check open from September 2021 -- even though to date HMRC has highlighted no issues with the processes undertaken by the client.

But as many contractors will know, HMRC is rarely in a rush. The authority takes its time as it picks over evidence, looking for ‘loose ends.’

This dragging of feet has been shown several times this year -- nowhere more visibly than in TV and radio presenter Kaye Adams’s recently handed down FTT case. The Loose Women and Radio Scotland presenter was subject to a crazy-making nine-year ordeal. During that time, all HMRC did was prove to us its inability to correctly interpret the IR35 legislation.

A solution to so-called ‘double taxation’ will go live on April 6th 2024

The so-called ‘double taxation’ of IR35 under the off-payroll rules is set to come to an end from April 6th 2024.

Currently, where a business has incorrectly engaged a contract outside IR35, HMRC recovers the PAYE tax liability from the fee-paying party, which is usually the recruitment agency, or the end-client.

But this action fails to account for the taxes paid by the contractor on the fee they received from the client – and so HMRC collects too much tax. The result of ‘double taxation’ has been one of the perceived risks of engaging contractors.

In 2023, we saw this issue act as a deterrent for businesses. With the fix now just a few months away, perhaps this deterrent is at least one IR35-related aspect which we saw last year on HMRC’s watch which won’t pervade into 2024.

Scrutiny over IR35 assessment practices 

In the 17 OPW checks we’ve been across, HMRC is looking at exactly how an end-client reaches a status determination; specifically, whether “reasonable care” is taken in reaching a given determination.

One area of frustration is the use of CEST, which remains a loaded dice. Despite the well-publicised and widely acknowledged flaws underpinning CEST, many businesses continue to use the HMRC tool, either as their default mechanism in making status determinations or as part of a broader suite. 

As a contractor, you might (understandably) feel powerless to do anything. But if your end-client is open to it, you can suggest an independent status review in place of CEST, which will offer a more nuanced review. It will also stand up better to scrutiny, given that HMRC has been known to ‘pick and choose’ when to accept the outcome of a CEST review.

Lastly, IR35 defence against HMRC is something fewer end-clients are going without

Whichever of these HMRC IR35 trends is most interesting to you, there’s one very clear, overall takeaway -- that HMRC is ramping up its off-payroll working compliance activity. And it’s not forgetting enforcement of the Intermediaries legislation either.

The knock-on effect – funnily enough – is that businesses are actively exploring how they can better manage these complex status rules and ensure compliance if the taxman comes calling. For contractors, this can only be a good thing when heading into 2024 and beyond.