The latest updates on IR35 legislation, including its impact on contractors and businesses, the “offset issue,” and the possibility of its repeal in the upcoming Spring Budget 2023.
The introduction of the IR35 legislation has generated a lot of controversy since its inception, with businesses and contractors alike grappling with the complexities of determining someone’s employment status for tax purposes. The IR35 regulations have been in force since 2000, and with the recent reforms in 2017, there has been a lot of uncertainty and confusion regarding the changes.
According to Seb Maley, CEO of Qdos, the complexity of accurately determining someone’s IR35 status can leave a “big grey area” for businesses, making it difficult to determine a status and creating financial risks for businesses.
In December 2022, a report was published by HMRC in collaboration with IFF Research, showing how IR35 reforms have impacted contractors. The report was based on the views of 353 businesses, and HMRC reported that the IR35 reform generated an additional £1.8bn in tax revenue between October 2019 and March 2022. In my opinion, the report did not adequately address the various issues that both contractors and businesses have been facing lately.
Despite the revenue generated, the issue of determining an individual’s employment status remains complex and has been a source of concern for many contractors and recruitment businesses. In a recent survey conducted by Qdos, the IR35 legislation remains contractors’ biggest concern for the year ahead, despite inflation reaching a 41-year high.
The CEO of IR35 Shield, Dave Chaplin, has identified a flaw in the legislation called the “offset issue,” which could lead to double taxation if a hiring firm gets the determination wrong. The issue has been highlighted in a National Audit Office report and was picked up by the Public Accounts Committee (PAC) in February 2022. Following this, the PAC reported it in May and labelled it a “structural flaw.” HMRC has said it will investigate the issue.
In my opinion, businesses have started to take IR35 more seriously and are trying to adhere to the rules. Companies have come to realize the importance of contractors in their operations, but this has created a significant administrative burden, along with potential financial risks. It is essential for businesses to balance their need for flexible resources with their responsibility to comply with the regulations.
Although there are cases that are straightforward and easily categorized, there are many situations that fall into a grey area. There isn’t a precise formula that defines what qualifies as employment for tax purposes, making it more of an art than a science. We need a way to define what we mean by employment for tax purposes because it can be challenging to explain it. If we can’t clarify the rules, it’s no wonder we face issues.
The IR35 off-payroll legislation has faced a lot of uncertainty lately, with the government announcing its repeal in the September statement, only to reverse that decision a month later. It has been a rollercoaster ride for many firms, and it’s unclear whether the legislation will feature in the 2023 Spring Budget which will be announced by Chancellor Jeremy Hunt on March 15.
With £1.8bn in tax revenue already generated, makes it unlikely for the government to “sacrifice” this tax generator due to the apparent “tax leakage” that occurred before its implementation. Also given the government’s priorities surrounding inflation, energy prices, Ukraine, and the upcoming general election, it’s doubtful there will be a repeal, although it may address the offset issue, mentioned earlier.
The Insights section of our website has a wealth of information covering the IR35 Off-payroll changes. If you require further help, please do contact Marie Pegram on 01462 687333 or by email m.pegram@uhy-uk.com.
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