Repeal of the off-payroll worker regulations - greater efficiency or more risk?

As part of the UK Government’s mini-budget delivered on 23 September, Chancellor of the Exchequer Kwasi Kwarteng announced that the 2017 and 2021 changes to the assessment of off-payroll working rules (IR35) will be repealed from 6 April 2023.

This means that, from this date, workers across the UK providing their services through an intermediary, such as a personal service company (PSC), will again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance.

Will these changes deliver the increased efficiencies the Chancellor has promised? Do they run the risk of encouraging an increase in tax avoidance? And what do they mean for organisations?

The shift in assessment responsibility brought about by the repeal of the 2017 and 2021 reforms certainly seems likely to simplify the way businesses take on contractors, but those businesses must also now prepare for new responsibilities.

IR35 assessment is complicated and costly

Many will be glad to see the back of the off-payroll working reforms.

Since the reforms were introduced for the public sector in 2017 and the private sector in 2021, it has been interpreted inconsistently by different organisations and in different sectors.

It has also created more bureaucracy. Some organisations have established whole teams to manage the processes required for compliance – a financial and administrative burden, which must be weighed against the annual GBP1bn of tax revenue that the off-payroll working reforms were said to generate for the Exchequer.

Some engagers of contractors in the public sector are now facing fines and liabilities in the tens of millions of pounds for failing to implement it correctly. It shows just how difficult it can be to get IR35 right – and costly if you get it wrong.

Chancellor Kwarteng’s decision came as a surprise – a decision presumably based on the calculation that the costs and challenges it created for businesses and workers may simply have outweighed that GBP1bn of annual revenue, rising to an estimated loss of GBP2bn from 2026/27 onwards, mostly associated with the National Insurance and cash flow impact of the PAYE system.

The decision is welcome because it will make it much simpler for organisations to recruit external contractors and opens up channels of talent acquisition which some industries closed off completely to help with compliance, but it does bring serious implications for organisations.

Who is most affected?

On the contractor side, there are broadly two types of people who will be affected - lower-paid workers typically in low-skill roles, and often highly paid specialists at the other end of the scale. For the lower-paid workers, mainly in sectors like transport, retail, or manufacturing, there is a danger that – without the checks involved under the current rules – they could be forced off-payroll and end up without the legal protections that they have as employees or employed workers.

At the other end of the scale, there are highly paid people working for organisations through PSCs.

As a result of the 2017 and 2021 reforms, organisations have had a higher level of oversight across the entire labour supply chain. Indeed, this oversight and transparency must continue - there still remains an expectation that engagers of any labour will undertake appropriate due diligence of the supply chain covering key flags such as VAT, Minimum Wage and Modern Slavery.

What do organisations need to do?

A big risk for organisations now is that they will ‘take their eye off the ball’ and remove the current controls and processes from April 2023, or think they can simply ignore compliance.

The changes don’t take effect until the start of the next tax year, 6 April 2023, so it’s important to follow the procedures until that date. Even then, the changes only apply to work done in the new tax year. Any work carried out on or before 5 April 2023 will still be subject to the old arrangements.

It's going to be important for organisations to keep a close eye on their supply chain, to ensure nobody working for them is being exploited by being paid below minimum wage or losing benefits such as holiday pay. Most organisations already do so for ethical reasons, but also rightly fear the potential reputational damage of getting it wrong.

The changes also provide a good opportunity for businesses to look at their overall workforce and see whether some roles could be brought in-house, rather than using external agencies. Indeed, offering employment is a way to ensure confidence - people may want the security of being on the payroll rather than operating through a PSC, especially with the threat of recession looming, the protections offered through schemes such as furlough and associated benefits and rights garnered under employment law.

What now?

Companies must now update their contracting terms and ensure they do not continue to absorb employer NI costs and other charges associated with ‘inside IR35’ determinations post 6th April 2023. Furthermore, companies must also create robust new processes to prevent the potential risk and crime of facilitating tax evasion under the Corporate Criminal Offences Act and ensure workers are not exploited through the supply chain.

With other upcoming changes expected in respect of the interaction of UK and EU law, we expect to see more workforce changes announced in advance of April 2023.

The jury is out on whether the changes will do as the Government intended, and for reforms of this significance, a consultation is likely. Some organisations may also be cautious of unwinding any existing contingent workforce structures until further information is forthcoming.

Managing the transition won’t be an easy one and the changes have the potential to touch a number of fields, including employment law, employment tax, budgeting, supply chains, procurement and international operations – an increasingly important issue as the UK finds its way outside the EU. We support clients across all of these areas and are starting to see clients look at how to navigate through to April 2023, their future options for engagement of workers and how to manage any transitions in a compliant manner. This is wider than simply the application of PAYE income tax and national insurance, do VAT and R&D impacts create a different view for different industries? At this stage organisations should pause and take a considered view before making any unbudgeted or commercial decisions..

Contact us to talk about the implications for you or your organisation of working in a new IR35 environment.