Umbrella contractors will be motivated to go back to PSC models. But how and when they do it will make all the difference to HMRC
Osborne Clarke’s Workforce Solutions Team sheds some light on the repeal of IR35/Off-Payroll reforms and addresses the most pressing questions contractors have right now. Plus a tip from WTT Consulting on how long you may have to wait before setting up another PSC.
- The repeal of 2017 and 2021 Off-Payroll reforms will become active from April 2023. This means staffing company and end-user liability will be removed from April
- The announcement of the IR35 repeal of the reforms came as part of the Chancellor of the Exchequer’s plans to promote economic growth by cutting red tape and taxes. The plan suggests that this change will cost the Treasury £1-2 billion of tax per annum
On the face of it, the repeal of the IR35/Off-Payroll reforms will be good news for many users and suppliers of contract workers, who will see this as an opportunity to revert to more tax-efficient ways of supplying and hiring those workers via personal service company (PSC) arrangements, according to Osborne Clarke’s Workforce Solutions team.
“That is because, under the current regime, users and suppliers risk being liable if in fact the PSC worker is ‘really’ not self-employed, which is notoriously hard to be sure about – and the regime places all sorts of administrative obligations on them if they want to avoid that liability.
Many end users have accordingly banned use of PSCs or substantially reduced their use of that workforce supply model.”Osborne Clarke, Workforce Solutions
And, of course, many workers will see this as good news as well and an opportunity to supply their services in a way which increases take-home pay.
What might slow the revival of PSC contracting?
It is likely that there will therefore if this repeal does in fact happen, be an increase in use of PSC arrangements by contractors and that end users and staffing intermediaries will permit supplies by contractors using PSC arrangements, says Osborne Clarke.
But there are a number of reasons why a return to the widespread use of tax-efficient personal service company arrangements may not be straightforward in all cases, the firm warns.
Here are some common questions that are starting to crop up, Osborne Clarke attempts to addresses them.
Will some contractors now have been semi-permanently “branded” inside IR35 so that it is hard for them to return to tax-efficient PSC contracting?
The repeal will lead to a return to the old regime, Chapter 8 of the Income Tax (Earnings and Pensions) Act (ITEPA), under which the PSC contractors were responsible for determining their workplace tax status and filing tax returns accordingly.
The problem for HMRC was that it became hugely burdensome for it to pursue, on a one-by-one basis, individual contractors whose self-generated status decisions it did not agree with. Often the value of extra tax recovered from a contractor would be less than the cost to HMRC of the legal proceedings taken. It had become an uneconomic tax to collect. That is why the new regime passed liability up the chain, so that end users and staffing companies were made liable for the tax and effectively enforced compliance by banning any supply arrangement they were nervous about.
This “compliance from the top” effect of the current IR35 regime will disappear if the current IR35 rules are repealed.
However, end-user status determinations issued recently and in the period to April may have a “hangover” effect for some time after the legislation is repealed. In the year or two after the repeal, HMRC may have an easier job taking action against many contractors because end users will have placed on the record (in their so-called “status determination statements” under the 2021 regime) their view as to whether a particular role is or is not “really” self-employed.
It may be difficult for contractors in such roles to mount effective defences if they receive IR35 assessments (with threats of high penalties for carelessly or deliberately misleading HMRC) for the period after April 2023, and we know that many contractors will be worried about that potential liability hanging over them.
Much business planning will need to be done to minimise risk in this area if PSC arrangements are going to return safely for certain types of role, particularly roles which have been clearly determined as being inside IR35.
Even if contractors are happy to operate as PSCs, will end users, who had determined relevant contract roles as inside IR35, be able to turn a blind eye to a return to PSC arrangements in those roles?
The Criminal Finances Act 2017 effectively obliges companies to take reasonable steps to prevent the facilitation of tax evasion in their supply chains. If they do not, and there is tax evasion in that chain, they face prosecution for a corporate criminal offence the penalty for which is an unlimited fine.
Also relevant to supply chain tax arrangements is the older offence of conspiring to cheat the public revenue which is a statutory conspiracy contrary to section 1 of the Criminal Law Act 1977.
It is widely considered that the main reason most contractors would want to operate via a PSC is to minimise tax (particularly NICs) by benefiting from associated self-employment arrangements. Will a clear (pre-2023) end client determination that a role was inside IR35 (and therefore not to be performed by a contractor using a PSC arrangement) be evidence that all involved are aware of the fact that a contractor who then is permitted (after April 2023) to carry out the same role via a PSC, are deceiving HMRC as to the contractor’s true tax status? By allowing that PSC arrangement to be used, will the end client and any relevant intermediary be failing to prevent the facilitation of tax evasion or (given supply chain costs will thereby have been saved to their ultimate benefit) conspiring to cheat the revenue?
It will be interesting to see how these factors will play out in sectors like healthcare, construction, IT, and financial services (where workers operated via PSCs on a widespread basis before the 2017 and 2021 IR35 reforms). Much business planning will need to be done to minimise risk in this area if PSC arrangements are going to return for particular roles. We believe some end users will be nervous about this area of potential criminal liability.
Will it all just be too much of a hassle?
Many end users have blanket-banned use of PSCs. Will they decide they just cannot be bothered to undo that policy? Will they really be concerned about losing access to some of the best talent (who may decide they will only take roles where they can operate tax-efficiently)?
It seems time will tell. Freelancer job platforms, such as YunoJuno are expecting end-clients to boost their use of freelancers because of the reform repeal and will equally be happy to wok with limited company freelancers as they will still be bound by IR35 rules.
How will contractors deal with the administrative aspects of setting up a PSC? Will use of accounting services companies create other tax risk?
Of course, many contractors will be able to resurrect their old PSC or set up a new one without much assistance. However, in the past many contractors have used specialist accounting service businesses to help set up and administer their PSC arrangements – those businesses offer cost-efficient online services, and we can see that that will be attractive to many contractors.
The trouble is that HMRC is currently attacking some of the arrangements operated by these specialist accounting businesses. It is using the 2007 managed service company (MSC) legislation set out in Chapter 9 of ITEPA to make all contractors who (in HMRC’s view) have used a specialist service provider to facilitate their use of PSC arrangements, liable for employment taxes. HMRC can use this MSC regime 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 running of their PSC company rather than whether they pass or fail employment status tests like the IR35 tests.
Will HMRC use other measures against PSC contractors?
The growth plan announcement seems to suggest the chancellor just wants people who claim to be self-employed to be left alone. However, HMRC may, in theory, have another way of attacking intermediaries who on-supply self-employed contract workers.
There are signs that HMRC may feel that it can, in some cases, use the 2014 agencies (aka intermediaries) tax legislation in Chapter 7 of ITEPA to attack not just sole trader arrangements but any other arrangements in which supervision, direction or control is present, including ones involving PSC contractors.
The big difference between this regime and the current IR35 regime is that it is just intermediaries (not end users) who are liable – and the burden of proof is on the intermediary to show that there is no supervision, direction or control of the worker (which is notoriously hard to prove).
Not quite the avalanche?
If this repeal is enacted then undoubtedly the volume of PSC contracting arrangements will rise again after April 2023, especially given that the cost-of-living crisis will make individuals and employer organisations minimise costs and maximise take-home pay. But we believe it may not be quite the avalanche that many might imagine, especially for certain types of role and in certain industries.
What should organisations do between now and April?
At this stage it does not look like the repeal will be retrospective and so for private sector end users the two tax years, 2021/22 and 2022/23, and the last 6 tax years for supplies to public sector end users, will still be subject to the current regime.
Suppliers and users of contractors should therefore remember that the existing 2017 and 2021 regimes will be in force until the repeal takes effect in April 2023. They should not unravel their current arrangements until then, though obviously a lot of planning will need to be done, for example relating to projects which may straddle the date of repeal.
What, of course, will be interesting to see is the extent to which HMRC seek to enforce from now the current regime. Our bet is that major breaches will definitely still be pursued, and of course there may be a new government (with a new set of policy objectives) before HMRC is out of time to bring claims relating to the current and recent tax years and that may lead to a flood of claims relating to those periods at a later date.
For those interested in the text of what the growth plan says, this is the relevant paragraph 3.44: “Repealing off-payroll working reforms – The 2017 and 2021 reforms to the off payroll working rules (also known as IR35) will be repealed 6 April 2023. From this date, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.”
One of the biggest hurdles to overcome for umbrella contractors wanting to set up a new PSC will be if a capital distribution was taken on the dissolution of the old company, according to Thomas Wallace of WTT Consulting.
If so then there needs to be a two-year wait under the Targeted Anti-Avoidance Rule to stop the distribution from being converted to a dividend. A company can be set up relatively quickly so until legislation is published and more is known it may have limited upside.Thomas Wallace of WTT Consulting