In its Autumn statement, the Government has announced that the Off Payroll Working Rules (generally known as IR35) introduced in 2021 are to be repealed from 6 April 2023. These rules were intended to bring those who provide their services through a limited company, but could be regarded as otherwise indistinguishable from employees, within the scope of PAYE.
The rules require Companies which hire contractors to conduct a detailed and somewhat cumbersome assessment of the correct employment status of the individual, using a test of “deemed employment” status. If the individual were to be regarded as a deemed employee within the framework, the client company was obliged to apply PAYE rules to the individual in the same way as would be apply to employees. This increased the cost of hiring contractors, though in practice many companies passed on the increased cost by lowering rates paid.
Many companies moved to employing directly those who had previously provided services as contractors when the off payroll changes became effective in 2021 and that will have led to increased PAYE payments to HMRC. We can expect a move now in the opposite direction, with companies recruiting contractors rather than permanent employees, particularly in sectors where this has been a norm, such as IT and many creative services.
However, the legislation permitting HMRC to assess the contractor’s personal services company for tax and NI on an employment basis is not being repealed. If HMRC takes the view that the working relationship looks like disguised employment rather than a genuinely self-employed service provision it can make an assessment that PAYE, including employers NI costs, are due on all earnings from the contract. The effect of the change therefore is to place the risk of this liability back on the contractor and his personal services company, rather than on the hiring company.
Individuals who supply their services through their own limited companies or similar vehicles should ensure that they obtain appropriate advice to ensure they understand their liabilities. HMRC has pursued a number of individuals who traded through personal service companies in high profile cases including, for example, a number of TV presenters, with varying degrees of success, but at considerable cost to those involved. We can expect to see more of such claims in the light of the changes announced.