Starting April 6th 2024, HMRC implemented a new set-off mechanism to address the issue of double taxation in cases of incorrect IR35 determinations made by an engager. This change allows the taxes already paid by contractors’ limited companies to be offset against the liabilities of the fee-payer (the client or agency), reducing the total tax burden and mitigating instances of over-taxation.
Despite these changes, the fundamental responsibilities of end-clients and contractors under IR35 remain. Clients must continue to assess the IR35 status of contractors, issue Status Determination Statements (SDS’s), maintain robust processes and demonstrate “reasonable care” to avoid penalties. We have seen increased compliance activity from HMRC in recent months, and IR35 audits are on the rise.
One significant pending issue is the outcome of the Professional Game Match Officials Limited (PGMOL), an employment status case pertaining to football referees, which hinges on the test of mutuality of obligation (MOO). It is expected that the Supreme Court’s judgment will clarify this position and how this critical test is to be interpreted moving forward.
We are also awaiting the rollout of Phase 2 of the new HMRC Check Employment Status for Tax (CEST) tool. The tool was moved on to a new platform late last year, and changes so far include additional guidance added within each section of the tool. Phase 2 is expected to include changes to the questions and logic, based on fully up-to-date status case law. If these changes are significant, we will be looking to establish what this will mean for previous determinations made using the old CEST version. Our advice remains that we do not recommend using CEST in isolation to assess IR35 status.
The Public Accounts Committee has again criticized the complexity and enforcement of the IR35 rules, highlighting that the current approach is deterring legitimate economic activity and pushing businesses to adopt risk-averse practices. The PAC has urged HMRC to simplify the rules and improve its proportionality in enforcement. They have also called for better customer service and clearer guidance to help businesses comply with the regulations.
Over the years, many MPs have called for reforms to, or scrapping of the newer IR35 (off-payroll working) rules, citing the complexity and burden it places on businesses and contractors. These calls for action may well influence the new government to consider IR35 in their election manifestos. We would by no means expect a complete abolishment of IR35, nor do we believe this would be right without significantly improved legislation to replace it.
Under a continued Conservative government, the existing IR35 rules are likely to remain as they are, meaning businesses must continue their compliance efforts and have in place robust assessment processes to avoid penalties. We can only hope that with continued pressure from MP’s, oversight bodies and stakeholders, the issues surrounding the IR35 rules which have been uncovered in the numerous reviews carried out since the reforms are adequately addressed.
Labour has proposed to introduce a single ‘worker’ status to simplify the current system (which includes ’employed’, ‘self-employed’, and ‘worker’ statuses). This could potentially eliminate the need for IR35 case law, with the aim of making it clearer and easier for businesses to engage contractors. However, if it a single worker status was that simple why hasn’t it been done already and could we end up with something even more complicated? If Labour wins and implements these changes, businesses and contractors will need to adapt to what will no doubt be a significantly different framework for establishing employment status.
The Liberal Democrats have published their manifesto this week and pledged to “review the Government’s off-payroll working IR35 reforms to ensure self-employed people are treated fairly.” It is positive to see IR35 mentioned in the manifesto and whilst it is uncertain whether the Lib Dems will ultimately have enough influence in parliament to make their IR35 pledges a reality, a focus on fairness could potentially lead to meaningful reform. However, we need to concentrate on implementing the recommendations from previous reviews and addressing the issues that have been identified repeatedly.
Bauer and Cottrell, long-standing advocates for contractors and the self-employed, urge the government in power on July 5th to consider the crucial role the self-employed play in the UK economy, and look to implement meaningful reforms to IR35. We don’t need yet another superficial review without involving a balanced view from all stakeholders. Instead, the focus should be on reforming and implementing recommendations from past reviews.
There is a pressing need to modernise and simplify the framework, making it more accessible and comprehensible for all involved parties. Significant improvements are also needed to the tools and guidelines to help contractors and businesses navigate the rules effectively. Finally, we call for a framework that includes clear regulation on how the rules are enforced, ensuring fairness and consistency across the board.
The outcome of the upcoming general election could bring about changes to IR35 and the broader framework of employment status. Both contractors and businesses should keep a close eye on party’s manifestos and prepare for potential changes. Whether it’s maintaining compliance under the current rules or adapting to a new (and hopefully simplified) system, staying informed and proactive is key.