IR35/Off-payroll labour rules – How they will work from April 2023

Although the Prime Minister had mentioned reviewing the IR35 rules during the Conservative Leadership election campaign, it was a surprise to most when the Chancellor stated in his Mini-Budget that the rules would be repealed from 6 April 2023.  

In fact, it is the off-payroll labour part of rules for the public sector (since 2017) and the private sector (since April 2021) that will be repealed: the original IR35 rules are expected to remain in place and the responsibility for applying them returns to the personal service company owner (the worker). 

So, at first glance, the repeal of these rules may be seen as good news by public sector bodies and private sector organisations who have had to implement new processes to meet their obligations under them. Details of how these rules will be repealed are not yet available but it seems likely that the law will simply revert to the pre-April 2017 position

Whilst the 2017 and 2021 IR35 reforms will be removed from 6 April 2023, the key message for businesses as engagers to take away is that many of their responsibilities remain. Effective Workforce Risk Management remains vital to protect your business so we have set out below what will and will not change and where you should focus your attention.

 

What businesses will no longer need to do from 6 April 2023

What businesses will still need to do in 2023/24 and beyond

Determine your size For IR35 purposes to decide if the off-payroll rules apply to your business   Assessments Undertake employment status assessments of workers providing their services through a robust contractual PSC arrangement.   Determinations Issue status determination statements to the worker (and the next entity in the chain) advising of that status.   PAYE and NIC As fee payer, you will not need to operate a payroll for workers deemed to be inside IR35 (deemed employees) – including on fees to PSCs for office holder roles (directors, non-executive directors, Board members and committee members).

Be prepared For HMRC IR35 reviews for the period April 2021 (2017 for Public Sector) to 5 April 2023, is your house in order?   Protect your business You may want to use more contractors, but if they do not comply with IR35, there is a potential Corporate Criminal Offence risk, so you must ensure that future engagements with PSCs are robust. Remember, for these purposes, an employee, a contractor and any other person providing services for or on behalf of the engager is an ‘associate’.   Directors Those providing services from April 2023 through a PSC will always be deemed employees, so their PSCs must operate PAYE and NIC deductions. If you don’t make sure they do, it may affect the way HMRC regard your compliance record.   Self-employed contractors You will still have a risk if you engage individuals directly on a self-employed basis: check their employment status to make sure HMRC would not regard them as de facto employees.   Other contract workers Put robust PAYE/NIC due diligence processes in place for all your outsourced workforce, i.e. where your labour supply chain includes services provided by Umbrella Companies, Temporary labour employment agencies and other third parties. Make sure you review the contractual obligations each time where procuring contractors from a third-party supplier.

What businesses should focus on before April 2023

Keep doing things right
The off-payroll rules for engagers are in place from April 2021 to April 2023 (April 2017 to April 2023 for Public Sector) so the end client and fee payer responsibilities must still be met during this period – don’t expect HMRC to take a light touch.

You can expect HMRC to focus on off-payroll labour obligations in any PAYE review conducted which covers 2021/22 and 2022/23. Businesses should review their policies and procedures so that you can sign off your position in April 2023 with a clean sheet. Read more here.

Stop ongoing problems
In our experience around a third of the cases we have been asked to review for “Off-payroll purposes”, the worker is engaged directly – often this is because the contract should have been with the PSC but was incorrectly drafted and the counter party is the individual worker. In these cases, the responsibility for operating PAYE remains with the engager and will do so going forward. So check your contracts now and out things right before 6 April:

• Where you have contracted with individuals rather than companies, can this be put right?
• Where you have contracted with individuals who claim to be self-employed, is that really their employment status for tax purposes? (This may well differ from their status for employment law purposes).

Don’t just kick workers off the payroll
If you have managed your current off-payroll labour risk by bringing all workers onto the payroll or using mandatory umbrella companies, you may well want to review the position for the future but assuming all can just leave the payroll again is probably a risky approach. For one thing, if you continue to use the same contractors, HMRC will see this as a strong reason to investigate each one over their IR35 position and possibly your business too.

Don’t forget the other tax laws for engagers
Other relevant legislation including the Agency rules, the Construction Industry Scheme and Managed Service Company (MSC) legislation is not expected to be repealed. So engagers must continue to have robust labour supply chain due diligence and documentation reflecting the actual arrangements.

For example, where the MSC rules apply this would mean that payments received by individuals providing their services through MSCs (PSCs based in/out of the UK) are subject to PAYE/NIC and this debt can potentially be transferred to third parties including the company’s directors, the MSC Provider, and in certain circumstances, other third parties i.e. you as the engager.

Don’t let one bad contractor damage your business
The off-payroll reforms were introduced to tackle widespread non-compliance with the original IR35 rules. Alongside them came the introduction of the Criminal Finances Act 2017 which introduced a corporate criminal offence for ‘failing to prevent the facilitation of tax evasion by an employee or associate’ (which includes contractors).

Having ‘reasonable prevention procedures’ in place is a defence against the potential criminal sanctions of an unlimited fine and a public record of the conviction. We are seeing HMRC starting to focus in this area so, instead of tearing up your off-payroll labour policies and procedures, look at refocussing them to demonstrate that you have taken reasonable care to ensure that your contractors are themselves complying with the rules. Read more here.

Help with your Workforce Risk Management
The repeal of the off-payroll labour legislation will no doubt be welcomed by many, but it is just one obligation amongst many and managing the risks that arise from a diversely sourced workforce will be an ongoing task.

If you have any concerns about how to ensure your business remains resilient and manages down its workforce risks, please contact Geraldine Browne or Renee Dawson.

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