IR35 reforms likely to be reinstated say legal experts
Some legal experts are not convinced that IR35 reforms set to be repealed in April 2023 will be set in stone or even come to fruition.
And if they do? According to these same experts, there will be new risks and HMRC enforcement powers contractors hiring companies, umbrellas, accountancy servicing firms and recruitment agencies must be aware of.
Anyone working in the contracting sector could argue that the policy uncertainty over self-employed and Off-Payroll working status is seriously impacting people’s lives, careers, businesses and livelihoods. But it would seem uncertainty is likely to prevail.
In a recent Insights piece by law firm Osborne Clarke’s Workforce Solutions team, it was stated: “We think it more than likely that by the time everyone has got used to these changes the IR35 reforms will be reinstated by a future government and we will all start again. The Grand Old Duke of York would have been proud of the history of tax policy in this area.”
More than one way to come after contractors and end-clients
Osborne Clarke reported that the repeal will affect HMRC’s ability to enforce IR35. However, even if the repeal of the IR35 reforms did go through in April, HMRC won’t suddenly become complacent, which is why the Treasury will use other regimes other than IR35 to counter tax avoidance.
“It may decide that IR35, after the repeal, is not worth trying to enforce on a case-by-case basis for individually small sums against individual contractors,” said the report.
The report continued: “That hassle is why HMRC told the then chancellor eight years ago that the original IR35 was not working, which led to the (soon-to-be-repealed) 2017 and 2021 reforms that allowed HMRC to go after deeper-pocketed staffing companies and end users.
“If it again becomes uneconomic from April 2023 for HMRC to enforce IR35, that may make HMRC turn to other tax legislation to tackle the increase in tax avoidance that seems likely to happen. The Criminal Finances Act (CFA) is a likely first choice. HMRC already routinely raises CFA compliance in large client annual review meetings and flags staffing supply chains as a key risk area.”
The question here is tax avoidance by which individuals? The contractors or the owners of umbrella companies?
How could HMRC use CFA after April in PSC contracting situations?
Osborne Clarke’s Insights piece has stated that the obvious target of CFA enforcement will be any roles that the end client has determined (pre-April) to be inside IR35, or blanket-banned PSCs from filling, but which the end client and staffing company or supplier consultancy allow to be performed by a PSC on a self-employed basis after April.
The above example, according to ti the legal experts, could be deemed to be “turning a blind eye to tax evasion” by the contractor since the contractor and staffing company knew full well that the contractor was inside IR35 and the end user knew full well that by using a PSC model the contractor was treating him/herself as outside IR35.
Otherwise, why would they bother using a PSC model? asks the report.
Freelancers and contractors may find it wise to start from scratch with new clients and iron clade outside IR35 contracts if they want to set up their own PSC/limited company after April 2023.
Unless the end client and others in the supply chain can show that they took reasonable steps to prevent the facilitation of that tax evasion in the supply chain they will have committed a corporate criminal offence under the CFA and be liable for an unlimited fine.Osborne Clarke Workforce Solutions
The “reasonable steps” that might be needed to avoid this liability will depend on various circumstances, but all in the supply chain would be wise to continue to have some sort of process – in relation to roles that had, perhaps cautiously, been determined as being inside IR35 – of establishing and recording that in fact there were decent grounds for believing they are outside IR35.
This may well look very similar to the current processes in place for assessing the status of PSC contractors and generating a status determination. In many cases, changes may be required to the roles and the way in which clients and staffing companies engage with PSC contractors to render the roles more obviously self-employed if PSC contractors are to be allowed to perform them.Osborne Clarke Workforce Solutions
HMRC will have eyes on umbrellas, accountancy service companies
The report indicated that specialist accountancy service companies that offer to help contractors set up as PSCs are likely to get heavily involved in helping contractors move back to PSC contracting.
“Many will be expecting their client books to grow aggressively in the next months and, may well have to get involved in substantial referral arrangements with some staffing suppliers even where contractors move from an umbrella company to being advised by an accountancy service provider within the same umbrella group.
“We also expect to see new accountancy services providers appear on the scene ready to make the most of the rapid growth in the need for PSCs and ready to pay substantial referral fees to get the business. It seems inevitable, for example, that some umbrella company providers will feel under pressure to help umbrella workers and sole traders back into PSC contracting arrangements.”
MSC enforcement could be expanded
The report highlighted that HMRC can use the Managed Service Company (MSC) regime enforcement example even if the contractors are, for the purposes of normal employment status tests, genuinely self-employed.
“HMRC can do this because the MSC regime focuses on whether the contractor has been helped with the setting up and running of their PSC company rather than whether they pass or fail employment status tests like the IR35 tests.”
Is this the end of referral fees?
The report noted that contractors under the repealed reforms will likely be encouraged to get their own accountancy support if they have, for example, been working via a recruitment agency or umbrella company and go back to a limited company structure. That said, there have been reports over the years of some staffing companies receiving referral fees from umbrella companies and accountancy services companies. If these fees are no longer on the table, new means of profit chasing could be on the cards. What shape or form that will take is yet to be seen.
Many less sophisticated staffing companies may not be aware of the risks of making these referrals and receiving referral fees, said the report.
“Alternatively, they may be hoping that HMRC will give up enforcing MSC as well as IR35 but we have seen nothing to suggest that HMRC won’t use MSC, especially if it sees a major increase in the use of PSCs,” said the report.
There are also potential risks ahead, said the report. Specifically, the logistical challenge and inconvenience for staffing companies of having to process and pay large numbers of PSC contractors’ invoices.
Staffing companies will need to be careful about introducing any arrangement that relies on an intermediary to invoice and receive payment on behalf of multiple PSC contractors; this could in itself give rise to an MSC risk. Self-billing arrangements will also need to be set up carefully.Osborne Clarke Workforce Solutions
Will some umbrellas take MSC risk?
The authors of the report believe that in the short term there will be a big reduction in higher-paid umbrella workers. This is because many contractors moved to umbrella models in 2017 and 2021 when the different stages of the IR35 reforms came into force, and they seem likely to want to leave umbrella work and return to PSC contracting.
The authors said:
“That leaves umbrella company owners with a decision about whether they want to move into or increase accountancy service provision hoping that HMRC will not attack them under the MSC regime. This is a classic dilemma in the staffing supply chain: act cautiously and lose market share, or take a risk and make hay while the sun shines.
“We imagine that more sophisticated umbrella companies will, if they do offer accountancy services to PSCs, be taking urgent steps to minimise MSC risk.”
Read the full report here.