IR35 Repeal: One Step Forward, Two Steps Back?

In his “Mini Budget” statement on Friday 23rd September, Kwasi Kwarteng announced that the UK Government will scrap the 2017 and 2021 reforms to the IR35 off-payroll working rules. The rationale he gave was that “reforms to off payroll working have added unnecessary complexity and cost for many businesses”.

The reforms will be repealed from April 6th 2023. The Chancellor explained that the effect will be that workers across the UK providing their services via an intermediary, such as a Personal Service Company (Ltd Company)(“PSC”), will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.

The IR35 reforms had changed the off-payroll rules to transfer the liability to the end client, away from the contractors they hire, to determine if the working relationship resembles a self-employed engagement or genuine employment. This made the end client liable for underpayment of tax by a contractor if the client was found to have wrongly determined the contractor’s employment status for tax purposes.

The reforms were introduced because HMRC had been pursuing a long-term strategy of preventing “false self-employment” where workers, who would in HMRC’s view be considered as employed, i.e. be subject to PAYE tax and NICs, had instead set up as PSCs to avoid paying as much tax and NIC.

The problem HMRC faced was that each case of “false self-employment” had to be challenged on an individual basis through the courts. It was not possible to launch a class action or use precedent to automatically reach a judgement on a perpetrator. So HMRC was faced with the impossible task of individually pursuing hundreds of thousands of PSCs with very limited resources.

HMRC therefore pushed through the IR35 reforms that would allow it to make the end client accountable, making it much easier for it to successfully challenge tax avoidance by pursuing the end client and deterring the clients from engaging contractors illegally.

So, what can we expect?

Firstly, Kwasi Kwarteng’s announcement can only be a statement of intent; the Government cannot guarantee the repeal of the IR35 reforms because it is Primary Legislation and therefore can only be adjusted by passing a Bill through Parliament, which must be debated and voted upon by both Houses. This opens it up to substantial risk of challenge, rejection and/or demand for replacement measures and legislation.

Furthermore, it is worth noting the “small text” within the Chancellor’s statement, where he stated “Of course, we will continue to keep [IR35] compliance closely under review”. In other words, the Government still wants compliance with the spirit of the original IR35 legislation, just not in the form of the 2017 and 2021 reforms. Remember that the original IR35 legislation was difficult to enforce. This means that, even if it succeeds in repealing the reforms in April 2023, the Chancellor’s statement implies that the Government will seek to replace the reforms with more effective compliance measures.

Even if the Government were to repeal the reforms with no replacement legislation, we would still not be in the same position as we were before the reforms were implemented. All companies were legally obliged to produce Status Determination Statements (“SDS”) for each of their worker categories and they will have made committed statements that their workers fall within or outside the scope of the IR35 regulations. Unless the working practices and contractual arrangements with these workers are changed substantially, it will be difficult to argue that it is legally reasonable to change their employment status just because the liability has been transferred. You could argue that the company “shouldn’t care” because they are no longer liable, but this is not the case; the company is still legally liable under the Criminal Finances Act 2017, Managed Service Company (MSC) and other anti-avoidance legislation, which HMRC will be able to apply much more easily on the basis of the published and authorised SDS forms.

To clarify, the Criminal Finances Act makes companies accountable for preventing tax evasion in their supply chains, while MSC legislation has a similar impact on intermediaries. Consequently, we expect that legal and accounting advisors to businesses, who are highly motivated to protect their professional position and reputation, should now be more cautious in their advice to their clients. We therefore expect end clients to be concerned about this increased liability, especially if they have an SDS declaring their worker to be working within the IR35 regulations and where the worker has changed their IR35 status without any major changes to the way in which they work. 

The consequence will be a period of fraught debate as the Bill passes through Parliament and the House of Lords, leading up to April 2023, during which time there will be considerable uncertainty. It is highly unlikely that any replacement compliance measures will be agreed in this timeframe, let alone developed to the point where they can be approved for implementation. This means that even if the reforms are repealed in April, we are likely to face a further prolonged period of uncertainty while alternative measures are developed, approved and implemented. All the while, we can expect a division to persist in the market, where risk-averse players will comply with the spirit of the original IR35 legislation and other more risk-tolerant players will gain competitive advantage by engaging PSC workers to replace employed workers. This will exacerbate the already unfair playing field.

What should you do right now?

The answer is nothing different to what you are currently doing until we have clarity on any changes that will be implemented next April. If you have signed SDS forms stating that your workers fall within scope of the IR35 regulations and you have complied with them to date, there is no good reason why you should decide to change that approach and a lot of very good reasons to remain compliant. You remain equally at risk of being pursued under the Criminal Finances Act if you decide to contravene the IR35 rules. If you have already decided to flout the rules and risk prosecution, we recommend you continue to consult your accountants and lawyers to get their advice on your position. It is quite likely that they will refuse to condone contravening the legislation through fear of losing their professional accreditations and their right to practise.

And if you are a haulage operator?

A further point to consider, specifically for the haulage sector, is the position of the Office of the Traffic Commissioner. Richard Turfitt, the Senior Transport Commissioner, has previously issued guidance repeating the HMRC statement that, “in road haulage, it is rare for someone to be genuinely self-employed [a Ltd Company contractor] unless they are an Owner-Driver”.

This was a key consideration in the Bridgestep Ltd public enquiry (UT/2019/54) and decision in July 2019, where a PSC driver had driven his vehicle into a railway bridge. The Traffic Commissioner (“TC”) found that the O-Licence holder and Transport Manager had engaged the driver as a Limited Company (PSC) to reduce staffing costs and then made incorrect decisions based on their misconception of how this affected the flow of liability. The result was that the TC ruled that the Operator’s and the Transport Manager’s repute was lost. The Company’s Operator licence was revoked and the Transport Manager was disqualified from acting until he had attended a refresher training course for transport managers before seeking further nomination as a transport manager. The company and its director were given a formal warning. The TC’s decision was upheld in an appeal hearing in December 2019.

The long and short of it is that, if an Operator suffers an incident that brings them in front of the Traffic Commissioner, the employment status of their drivers will be an important consideration of the judgement process. If the Operator has engaged drivers on a PSC basis, whether permanent or agency, for the purposes of reducing staffing costs, this will lead to a loss of repute and contravention of the STC’s employment guidance, which will likely result in a harsher judgement and increase the risk of revocation of their O Licence and/or disqualification of the transport manager.

Hence, even if the IR35 reforms are repealed and the financial liability for payment of correct taxes passes from the haulier back to the PSC driver, it is still not advisable for an Operator to engage PSC drivers due to the risk of harsher judgements from a hearing with the Traffic Commissioner, nor are they likely to welcome being pursued by HMRC under the Criminal Finances Act.

To conclude…

Ultimately, Driver Require, as a specialist temporary driver recruitment agency, seeks a level playing field where haulage companies and their driving agencies compete based on value-for-money, quality and compliance, without the distortion of competitive advantage through tax avoidance. We want a transparent competitive environment where the IR35 rules are either completely scrapped for all parties, or the opposite, where they are rigorously enforced, but not a halfway house where uncertainty and an unfair playing field prevail.