IR35 regime to stay as is, UK chancellor announces

The new UK chancellor, Jeremy Hunt, announced this morning that the IR35 reforms of 2017 and 2021 will now not be repealed from April 2023. Staffing companies and end clients will continue to be liable for personal service company (PSC) contractor tax and, given HMRC's likely refreshed focus on enforcement, should keep going with their procedures relating to determination of the IR35 tax status of PSCs.

The market reaction to the apparently unfunded tax-cutting proposals of the previous chancellor means that this comes as no surprise, especially given that we could only imagine a much larger surge in use of PSC contracting than the initial HM Treasury predictions so that the forecasted tax loss of £1-2bn per year might have been much higher. (Readers of our briefings will have noted our suspicion from the outset that the repeal would ever happen.)

Economic uncertainty

The UK seems likely to face a period of greater-than-expected economic uncertainty and this will put pressure on the revenues and profits of many involved in the use or supply of contingent workers. Historically, downturns have led to a surge in aggressive tax avoidance (or even evasion) schemes via certain types of umbrella company, as staffing companies and end clients try to find a way of paying less for the same labour supply. Given that PSC contracting now seems unlikely to be a quick fix for contractors who want to increase their take-home pay we may see an increase in use of tax avoidance schemes by some, but by no means all, umbrella companies and use of various types of self-employed model. 

However, HMRC's anti-tax avoidance activity in labour supply chains has become more aggressive. There are other steps HMRC is taking and will take as part of this crackdown: it now expects end users and staffing companies to carry out due diligence on their staffing supply chains to try to prevent tax avoidance (and tax evasion) in supply chains and has better tools than in the past to attack organisations whose supply chains are involved in what it sees as bad practices. In many cases, it will be no defence that the organisation did not know what was being done – HMRC expects proper due diligence to find out. 

Osborne Clarke comment

At some stage in the next months, there may also be proposals from the government about further regulation of umbrella companies – which will need to be watched carefully. We believe that better umbrella companies will welcome any such regime, if it can help eradicate the aggressive tax avoidance and evasion that undercut what they offer (and in a way that they have found very hard to compete with in many sub-sectors).

One thing to keep an eye out for is possible improvements to the way that the current IR35 regime works. There has been talk of making the tests easier to apply such that they do not lead to so many PSC contractors being told that they cannot operate on this basis even though they would otherwise seem to be well suited to self-employed engagements. But we suspect that it will not be possible to introduce practicable changes, in what is a complex area, quickly.

And in the meantime HMRC continues to use the MSC legislation to attack PSC arrangements, continues to call out certain umbrella arrangements as tax fraud and has started using the agency legislation to attack self-employment arrangements where it cannot be shown there is no supervision, direction or control over how the worker's work is done.

So, take care. There are still skills shortages in many areas of the economy and the flexible workforce model staffing has adapted, and in many cases thrived, in previous downturns. However, we think that HMRC's inevitable focus on the likely surge in potentially (or obviously) unlawful tax avoidance schemes will make this a challenging time for those users and suppliers of contingent workers who are looking for the cost savings that those schemes might once have appeared to make possible. Staffing companies with good systems and an excellent niche, or who are in a volume-supply area and have cut costs through use of automation, will not need those savings to survive and thrive. Others may face a more difficult period.