IR35 Changes: IT Contractors Not Out Of The Woods Yet

On Friday 23^rd September 2022, at our new Chancellor’s first mini-budget, Kwasi Kwarteng sent shock waves through the IT contracting community, announcing his intention to repeal the off-payroll working reforms from the start of the next tax year – April 6^th 2023. Originally deemed ‘IR35 reform’, these off-payroll rules were established in the public sector in 2017, expanding to cover the private sector in 2021 after a one-year delay due to the pandemic.

Many contractors have been rejoicing in the knowledge that they will soon be able to recover the powers they lost, deciding whether they fall inside or outside IR35. Although there are nervous mumblings from businesses, the majority I am speaking with are happy in the knowledge that contractors will once again be in the position to make a call on their own tax affairs, taking the risk off these businesses’ hands.

From my position as an IT recruitment business owner, I have embraced this abrupt news with open arms. Yet I do worry when I see and hear phrases like ‘IR35 is dead’ being thrown around on social media and within the IT contracting community. IR35 is very much alive and will continue to be so no matter what happens between now and April 2023.

When and how did these IR35 changes come about?

Liz Truss mentioned her intention to review the 2021 IR35 changes if she became Prime Minister, yet I and 94% of the IT contractor community (according to Contractor UK) did not expect her to follow through on her promise, let alone to surprise us by repealing the reform in her cabinet’s first mini-budget, just 17 days after she assumed her position.

Chancellor Kwasi Kwarteng’s move to squash the 2021 IR35 reform altogether certainly hadn’t entered my mind, it took me by complete surprise, especially given none of the normal protocols for implementing tax change had been followed.

“The Government recognises the importance of engaging fully with individuals, practitioners, businesses and other organisations in the development of tax policy. The best public engagement allows the Government to explore, develop and test new ideas to improve the tax system, and to ensure that change is well targeted and its likely impacts are understood. Better scrutiny of tax legislation, through early exposure of drafts, will help ensure that legislation is fit for purpose.”

The HM Treasury and HM Revenue and Customs Tax Consultation Framework cite a 5 step process for tax changes, including “one formal, written, public consultation in areas of significant reform.” Nevertheless, Liz Truss’ government ignored this framework, undertaking a substantial change without even consulting the HMRC. This will have caught HMRC off-guard, and I suspect they will become even more militant as a result.

How will this IR35 reform reversal impact contractors?

In my opinion, although contractors should start preparing themselves for this change to IR35, they must carry on as normal until it reaches Royal Assent. Until that time, nothing is guaranteed. After all, we’ve seen the government make U-turns on more than one occasion! In a recent Contractor Calculator article, Dave Chaplin, CEO of IR35 Sheild, explained how there are “six billion pounds worth of reasons why all rejoicing would be premature, and why all parties in the supply chain should not be complacent as we approach April 2023, nor beyond.”

I know that many umbrella contractors will look to switch from on-payroll (inside) to off-payroll (outside) from April 2023, however, they will need to raise new contracts with their clients in order to do this. I expect 99% of clients will honour their initial agreements, however, depending on market rates, contractors may find that a small minority of clients take the opportunity to negotiate.

With the economy adjusting to our new government and the wider employment market shifting accordingly, these IR35 changes will be positive for many contractors’ take-homes, therefore, I do expect to see a slowdown in rates – clients will no longer need to dangle an extra carrot!

Some companies stopped using contractors altogether leading up to the IR35 changes in April 2021, due to the responsibility for IR35 status determinations sitting solely on these businesses’ shoulders. I expect SMEs and start-ups will be the first to throw their hats back into the ring, with larger, more risk-averse companies following once they realise why these other companies are securing the best IT talent.

I would warn all IT contractors looking to make the switch to be extremely cautious. They will be playing a dangerous game, and losing could mean a significant financial loss. HMRC has far more information on contractors than ever before due to companies being required to make IR35 status determinations.

If a contractor suddenly switches to a PSC, I suspect the individual would likely move up the list of people the HMRC wants to speak with – especially if they are still working for the same company. Most likely there will be some kind of fishing exercise, it could come in the form of a scare letter, or even a phone call from a tax inspector – and it’s clear what their first question will be: “Are you in the same contract that was previously marked inside IR35 by the business?”

Recently quoted in the Financial Times, Andy Chamberlain, Director of Policy at IPSE, suggested “contractors moving outside IR35 should make sure they get tax investigation insurance to protect them from fees associated with any HMRC inquiry.”

What response should we expect from HMRC?

Unfortunately, given the complexities and unforgiving approach HMRC took to the 2021 reform introduction and the pushback from its Check Employment Status for Tax (CEST) tool, I do not expect their perspective to significantly shift from April 2023.

With the exception of criminal activity, in early 2021, HMRC pledged that information obtained through changes to the IR35 reform would not be used to open compliance checks on contractors for tax returns before 2021. In an ideal world, HMRC would commit to a similar path and state that the way a PSC was deemed in the past, will not impact how they are viewed going forward. However, I am not hopeful this will be the case, and contractors should not rely on this when making decisions.

In fact, Ex-HMRC tax inspector Kate Cottrell warned Contractor UK readers that “An IR35 enquiry looks at the whole picture at least four years back, so it is inevitable that history will come into it especially if the PSC is at the same client. The ‘whole picture’ includes any SDS and if produced by the client as inside IR35, [it means] going outside IR35 will be a dangerous game, unless the outside-evidence stacks up.”

I recommend that IT contractors come up with a transition plan, but carry on as normal until the reversal becomes law. Contractors are not out of the woods yet, and never will be unless they decide to sit inside IR35. Whilst businesses will no longer carry any of the associated risks, contractors will.  So they must act diligently – it would certainly be prudent to consult with IR35 professionals such as Qdos or Kingsbridge in this strange interim period.

Whether you are an IT contractor or you work for a business which regularly collaborates with contractors, please get in touch if you have questions and would like some advice.