Liz Truss’ short-lived proposal to repeal the 2017 and 2021 off-payroll working rules was met with a collective sigh of relief from the market. It felt as though the pressure of the last few years had been lifted, along with this barrier to the engagement of flexible workers.
The pressure is now back on, but there are lessons we can learn from this temporary relief.
Reasons for repeal. Key statements from Liz Truss and Kwasi Kwarteng reveal two motivations for the repeal: unfair tax bills “wrongly clobbering genuine self-employed tradesmen” (Truss) and a need to remove “unnecessary complexity and cost for many businesses” (Kwarteng).
Despite HMRC responses to three separate independent reviews of the changes — by the House of Lords Finance Bill Sub-Committee, the House of Commons Public Accounts committee and the National Audit Office — this was the first admission by the government that the new rules weren’t working as they should. At last, it seemed as if the Treasury was listening.
Removing barriers to engagement. The flexible workforce is an essential resource — allowing businesses to deliver projects that require additional resource or specific expertise, filling gaps without long-term financial commitment and supporting rapid business growth. Unlocking this workforce is vital to the health and growth of the economy.
It follows that the purpose of the off-payroll working rules should be to facilitate engagement within a compliant and fair tax framework rather than creating a barrier for businesses.
Managing complexity. Perhaps the biggest barrier to engagement is the requirement to make accurate employment status determinations. While some contractual arrangements might appear obvious, we know that many fall into a complex grey area where precedents from case law must be applied.
The process of making the determinations is time consuming and involves collaboration between all parties. Yet it is imperative to get it right to avoid the risk of tax liabilities further down the line. Given the Treasury’s expectations to recoup £1-2bn a year from the IR35 reforms, we can assume that HMRC enforcement will be aggressive in the coming years, although it should be noted that the majority of this tax yield will come from compliance with the rules rather than fines and penalties punishing non-compliance.
In the long term, there are ways in which the rules could be amended to provide clearer guidelines, but in the short term, agencies and hirers can overcome this barrier by putting their own robust systems and processes in place for managing their responsibilities.
Many agencies and hirers have already invested in these systems to meet their new responsibilities, freeing them up to engage workers as required. For those that haven’t done this, now is the time.
Wrongful determinations. Many contractors feel they have been wrongfully deemed to fall inside IR35. This means working under PAYE, with National Insurance and Income Tax will deducted from take-home pay.
For this reason, most skilled and experienced contractors will actively seek work outside of IR35 through a limited company which offers better take-home pay and more autonomy. Hirers and agencies that can offer these roles in confidence will be able to continue to secure the talent they need.
To improve the system, the government should explore what can be done to manage contractor appeals fairly and with minimum disruption to the businesses responsible.
Let’s talk about umbrellas. For contractors forced to work inside IR35, whether rightfully or wrongfully, umbrella companies currently provide the most suitable structure for employment while maintaining flexibility. However, the market remains unregulated and there are clear issues with some providers. From tax avoidance and payroll disputes to funding challenges and disagreements over how to manage holiday pay, there are many reputational risks for agencies and hirers when it comes to finding the right umbrella partner.
Confidence can be found by working with reputable partners who subscribe to professional standards of practice and ensuring that they can evidence the practices they are required to follow.
It is clear that the off-payroll rules are not working as they should, but rather than another review, we just need the government to take heed of the advice they have already been given. In the meantime, agencies and end hirers must do what they can to manage the current complexity compliantly while ensuring that they continue to attract the talent that they need.