Publish Date

Mar 17, 2022

Off-Payroll Working Rules (“IR35”) Expansion into the Private Sector – One Year On

A&M Tax Advisor Update

Welcome to the first in our Employer Tax Year-End Update series of articles, which we will share over the coming 6 weeks, as we count down to the UK tax year-end and start making changes for the 22/23 tax year.

In this first of these articles, we take a look at the off-payroll working rules, 12 months after the IR35 reforms were expanded across both the public and private sectors. This has presented many challenges for employers and contractors, particularly with the rule changes coming in during an already difficult period for businesses still coping with the effects of COVID-19.

Now that HMRC’s initial ‘soft landing’ approach to the IR35 reforms is ending, it is more vital than ever that businesses are compliant with the rules.

IR35 – what changed?

As a reminder, IR35 applies to medium and large businesses who engage workers through an intermediary. Under the new rules, it is now the responsibility of the engaging business to determine whether each contractor they engage via an intermediary (eg a personal service company) should be taxed as an employee or as a self-employed contractor. Prior to 6 April 2021, this decision was the responsibility of the individual contractor.

The rule changes mean that, if an engager fails to take reasonable care in assessing the status of contractors, then the engager can become liable not only for the additional employer National Insurance cost, including any Apprenticeship Levy applicable, but also the income tax due under PAYE, and the employee NIC payable.

What next?

HMRC confirmed they would not seek to apply penalties for IR35 inaccuracies in the first 12 months, unless there was evidence of deliberate non-compliance. With this grace period coming to an end, we expect to see a marked increase in HMRC compliance activity in relation to the off-payroll working rules.

Furthermore, the House of Lords Finance Bill Sub Committee have recently published a report, setting out the findings of their inquiry into the operation of the reforms in the first year. These reflect concerns we have seen in the year. In response, we have taken the following measures;

  • Introducing our TEST tool, given the ongoing issues and limitations of HMRC’s ‘Check Employment Status for Tax’ (“CEST”) tool
  • Assisting clients with undertaking due diligence on their supply chains and in particular umbrella companies and agencies, where it can be difficult to identify compliant suppliers
  • Increased administrative costs with no real improvement in timeliness of hiring or the ability to attract and retain talent

Time will tell how HMRC decides to respond to the recommendations set out in the sub-committee report in relation to these matters, and what their next steps will be to review and monitor IR35 compliance across the private sector. What is clear now is that IR35 will continue to have a significant impact on businesses and contractors for the foreseeable future and lessons should be learned from failures identified in the Public Sector, for whom the rules have applied since 2017.

In our next article, we will look at some of the practical aspects of applying the IR35 rules and key issues affecting businesses, since the reforms were implemented 12 months ago.

How can we help?

A&M Tax can assist clients with all aspects of their IR35 responsibilities. Our team of very experienced professionals has expertise across tax, HR and finance, including in-house roles and status specialist roles within HMRC. Please contact your usual A&M point of contact or Louise JenkinsTracey NortonClinton KnoxLinda Cameron, or Monica Houston.