IR35 Revisited – the Full Lowdown on IR35 and the Latest Developments with Off-Payroll Working

“Ditch it or fix it!” exclaimed many across the UK in the lead-up to the March 2023 budget. They were, of course, referring to IR35 during what seemed like a good opportunity for the government to take action regarding the off-payroll working rules.

As it happened, IR35 remained untouched, and it appears that the legislation is here to stay for now. That said, it seems sensible to revisit IR35 and touch on any latest developments in the legislation and what it means for contractors and those businesses that source talent from the contractor pool, especially in the digital sector.

The tax rules which were set out in IR35 largely apply to contractors who provide services via a personal services company (PSC). This is a company owned by the contractor which engages with the entity receiving services from the contractor. The rules also apply to self-employed individuals who are engaged with those same entities.

The purpose of the rules is to prevent individuals from avoiding income tax payments and national insurance contributions via the use of a PSC in circumstances where they are employees for all intents and purposes.

In the same vein the rules, as amended from April 2021, apply to the entities engaging with contractors where that entity is in the public sector or satisfies the criteria to be a medium or large private sector business. This means that under the current regime those entities in the public sector or which are deemed to be medium or large private sector businesses are responsible for determining if their contractors should be considered an “employee” in terms of their tax treatment. Those businesses would need to use reasonable care in making such decisions and act in accordance with the guidance from HMRC and failure to do so could lead to the contractor being deemed to be an employer.

The short answer is “yes” for both the contractor and entities who look to the contractor pool for talent.

In the case of the former, there is the obvious desire to work in the most tax efficient way possible but also the rules potentially make it less desirable for businesses who fall under the IR35 rules to engage contractors, thus limiting potential roles for those offering services as a contractor.

In the case of businesses that look to utilise contractors in order to satisfy a need for talent in a flexible manner, the IR35 rules create the burden of determining the tax status of the contractors and the potential for tax and national insurance liabilities where the working arrangement is deemed to be more of an employment situation. Additionally those liabilities may arise where proper care has not been taken to assess the status of the contractor.

It is important to note though that the rules only apply to public sector entities and medium and large private sector businesses. There is an exemption for small businesses which are end users of contractors services and in order to qualify the business must meet two of the following:

• Annual turnover is no more than £10.2 million
• Balance sheet total is no more than £5.1 million
• No more than 50 employees.

Businesses falling under this criteria do not need to determine the tax status of their contractors, though the contractors themselves would still need to ensure they are satisfying HMRC’s requirements to be deemed a contractor rather than an employee and thus save on income tax.

The biggest issue which seems to be under review is the issue of double taxation. This situation arises where a business engaging a contractor makes an incorrect decision about the tax status of the contractor which is discovered by HMRC later on. In this scenario, the business then becomes liable for tax and national insurance contributions for the contractor.

Alvin Ittoo, Head of Corporate & Commercial Department, Acumen Business Law 

Whilst IR35 remains a big consideration for businesses and contractors alike, there are some developments with the recent IR35 review. There is an expectation that some changes may come in in April 2024 but that cannot be confirmed at this state.

The biggest issue which seems to be under review is the issue of double taxation. This situation arises where a business engaging a contractor makes an incorrect decision about the tax status of the contractor which is discovered by HMRC later on. In this scenario, the business then becomes liable for tax and national insurance contributions for the contractor.

The problem here is that it may well be that the contractor has paid the relevant tax and national insurance contributions by the time the engaging businesses error is discovered. Thus there is scope for double taxation and currently HMRC do not offset the tax which has already been paid by the contractor.

This, in the minds of many, is only one of many flaws with IR35 and seems to be one which is finally being addressed. The issue does exacerbate the problem for contractors of businesses being less inclined to turn to the contractor talent pool.

Only time will tell how this problem will be addressed and whether further review will be taken into the other potential pitfalls of IR35.

So IR35 is here to stay and all the while there is increased risks for businesses to consider when utilising contractors which in turn reduces the opportunities for individuals to work in what has historically been a more tax advantageous manner.

There is something of a silver lining though. Where an entity can work with an end user business, which falls under the medium or large business definition, in a manner which is truly that of a service supplier then the IR35 rules will not apply. This may also be so where that entity itself uses contractors if that entity falls under the small business definition, provided of course that the working practices do satisfy the relevant tests for true contractor style working. This can provide an alternative means of sourcing talent for public sector entities or medium and large private sector businesses.

Fresh Egg’s experts ensure you stay on the right side of new tax laws, mitigating any IR35 risk as mentioned above.

Working outside of IR35 enables us to access a much wider network of specialists without any hidden costs or charges to our clients. The last few years have shown record skills shortages in digital marketing. It’s often a real challenge for organisations to find a permanent team member with the desired level of skills and expertise. Even if you do, they will take time to onboard and bed in, and meanwhile your vital digital projects can be at risk of delay.

We know the industry, we understand digital projects, and we have access to a wide talent pool that has all been qualified and approved by our in-house digital specialists. We're industry insiders who comprehend digital projects inside out, and we have direct access to an amazing collection of digital talent.

Our experts can work flexible contracts from a few days to a few months. This flexibility gives our clients a truly adaptable project resource as and when required.

We work with clients to precisely deliver against a statement of work, ensuring there is a focus on output as well as time supplied. We deliver award-winning work, and we bring that success to the table when assessing what expert is best placed to undertake a specific project. Fresh Egg Experts is our short-term contractor service, and our team is drawn from industry networks and Slack communities not generally available to recruiters.

As a specialist digital marketing agency, our experts cover all areas and technical specialisms within digital in line with any service we provide. Our contractors also have frontline access to our in-house digital experts for additional support, an extra element that a standard recruitment service cannot offer.