What IT contractors need to know - IT SPARK Media

What IT contractors need to know


The government has signalled its intention to repeal the controversial IR35 tax avoidance reforms from April 2023, and the news has been warmly welcomed by the IT contractor community.

Chancellor Kwasi Kwarteng confirmed that the government is seeking to roll back the 2017 and 2021 changes made to the way the IR35 tax avoidance rules work in the public and private sector, respectively, during his “mini-budget” on Friday 23 September.

In a statement to Computer Weekly, signed off by both HM Treasury and HM Revenue & Customs (HMRC), a government spokesperson said the changes were being introduced to bolster the growth potential of UK businesses. 

We have repealed the reforms to the off-payroll working rules to simplify the tax system and reduce the administration burden on businesses which engage contractors, which in turn makes it easier for them to be more productive and grow,” said the statement. 

The shock announcement took the contracting community by surprise, who, at most, were banking on Kwarteng’s address providing more detail on prime minister Liz Truss’s pre-election promise of a review into how the IR35 rules work.  

In the immediate aftermath of the announcement, Computer Weekly received feedback from various contracting market stakeholders who welcomed the government’s commitment to revoking the reforms, which have been widely blamed for stifling the dynamism of the UK IT contracting market.

However, in the days following Kwarteng’s “mini-budget”, its broader contents of tax cuts and policy changes have drawn criticism from the likes of the International Monetary Fund and the Bank of England, with the government finding itself under growing pressure to revise its spending plans after the value of the pound fell to an all-time low.

This pressure has already seen – 10 days after it was first announced in the mini-budget – the government U-turn on its plan to abolish the 45p rate of income tax for individuals earning more than £150,000 a year.

There have also been media reports claiming Conservative MPs had begun preparing letters of no confidence in Truss over concerns about the potentially damaging impact the mini-budget would have on the UK economy, while Labour leader Keir Starmer called for the financial statement to be abandoned.

Given the political and economic fallout from the mini-budget, it is perhaps unsurprising that IT contractors are being warned not to get too excited about the government’s plans to repeal the IR35 reforms.

“Experience tells us that delays can happen at the last minute, and for now, the IR35 reforms are still binding law,” said Dave Chaplin, CEO of contractor tax compliance firm IR35 Shield. “.So, I advise all parties to carry on as usual for now, but have a transition plan ready.

“The chancellor has signalled his intent, but it is not yet in the statute. The next Finance Bill will need to be drafted, laid before the House for first reading, and then travel through Parliament. Initial drafts for an autumn bill will likely be seen around November, reaching Royal assent sometime in February or March 2023.”

When Computer Weekly contacted London-based international law firm Osborne Clarke for comment on what preparations end-user organisations should make ahead of the proposed April 2023 end date, the responses it received also emphasised that the repeal might not happen.

For that reason, Osborne Clarke UK partner Kevin Barrow said enterprises should not start unravelling their current IR35 compliance procedures right now. “Leaving aside the possibility that the repeal might not happen if there is a change of government, the existing regime is still in place until at least April 2023 and is likely to still be enforced,” he said.

Reining in the celebrations

But while the revocation of the reforms is not yet set in stone, social networking platforms such as LinkedIn and Twitter have been filled with celebratory posts from contractors, rejoicing at the prospect of being allowed to determine for themselves again how they should be taxed.

The reason for this is that what the government is proposing to repeal is a piece of legislation known as Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, which is what conferred on public and private sector organisations responsibility for determining how contractors should be taxed since 2017 and 2021, respectively.

This means that from 6 April 2023, contractors who provide their services via a PSC or limited company set-up will again be responsible for determining if the work they do, and how it is performed, means they should be treated as an employee for tax purposes (inside IR35) or as an off-payroll worker (outside IR35).

A major reason why the prospect of this change generated such a positive response on social media from the contractor community is because the roll-out of the reforms in 2017 and 2021 prompted some public and private sector organisations to introduce hiring bans that prohibited the engagement of limited company contractors.

Other firms, meanwhile, decided to issue blanket determinations whereby all contractors were assessed as being inside IR35, regardless of whatever evidence the contractors could muster that suggested they were working outside.

In both scenarios, the end goal was to ease the cost and administrative burden that complying with the reforms had placed on end-hirers, but it was the contractor community that bore the brunt of these IR35 compliance strategies.

Computer Weekly reported on numerous instances when outside-IR35 contractors were told their working arrangements had been reclassified as being inside IR35, prompting those individuals to exit IT projects.

This is because the contractors feared, if they had up that point been working outside IR35,  that having their engagement reclassified as inside IR35 might raise a red flag or two about their tax affairs within HMRC.

These walkouts were also often motivated by the fact that accepting an inside-IR35 determination would likely result in the contractor’s take-home pay decreasing, because their employment tax liabilities would increase.  

For these reasons, there may be contractors out there that think repealing the reforms means they can personally right the wrongs of the hiring bans and blanket determinations, and immediately return to working outside IR35 again, but Seb Maley, CEO of IR35 compliance specialist Qdos, cautioned against this course of action.

“I understand the temptation that contractors will have to immediately switch to working outside IR35 next April, particularly if they were blanket-placed inside IR35 by their client,” he said.

“However, any move back to operating outside IR35 should only be done following a rigorous review of the contract and working practices. I have no doubt that HMRC will be watching very closely indeed.”

On this point, if HMRC does find fault with how contractors have conducted their IR35 status determinations, they will be liable for any unpaid tax or national insurance contributions (NICs), as per the old IR35 rules. And if the fault is found to be due to a careless or deliberate misinterpretation of the IR35 rules, they may face a penalty.

Computer Weekly asked HMRC for a steer on its IR35 enforcement strategy once the reforms are repealed, and received this statement: “We appreciate some contractors will be determining their employment status for the first time, while others will not have done so for a while. We will therefore support contractors to understand what they need to do from April 2023 and help them to get their tax right.”

A return to outside-IR35 working

Computer Weekly spoke to a number of IT contractors in the days following Kwarteng’s announcement who are hoping that the repeal will spell a return to them working outside IR35 and operating as a PSC, but they are aware of the risk and pitfalls involved. 

“Working through an umbrella is the pits,” one contractor told Computer Weekly. “I’ve gone from being paid weekly to now every six to seven weeks in an opaque invoice and follow-up cycle.

“I have to chase both the client and the umbrella company every month to make sure I get paid. I would like to do my job instead of working as a quasi-accounts payable clerk. As soon as I’m able, I will be going back to working as a limited company.”

Another IT contractor, working within the nuclear sector, said they are hoping to resurrect their limited company, but are concerned that doing so might raise a red flag about their tax affairs to HMRC.

“Up until the implementation of the IR35 reforms, I had been working via a limited company for almost 10 years until a month before the changes came in,” said the contractor. “Then came a blanket decision by higher management that we would all be deemed inside IR35.

“Even though we were shown to be working outside using HMRC’s own Check Employment Status for Tax tool, our agency gave us an option to go inside or umbrella. No formal interview or individual status determination was ever conducted for me. I was funnelled into choosing an umbrella. On the back of [the chancellor’s announcement], I will be looking for a contract with an outside-IR35 status and working as a PSC once again.

“The worries for me are that… renewing a contract on a once determined inside IR35 role as now available as a PSC will get flagged to HMRC. The role is quite clearly and easily determined as outside IR35, but I worry that the nuance of the individual engagement will be lost.”  

Other IT contractors that Computer Weekly spoke to were similarly wary of how any shift from working inside to outside IR35 will be interpreted by HMRC.

“Most companies just did blanket bans on PSCs, so the status of their roles remains underdetermined,” another IT contractor told Computer Weekly. “It is a brave contractor who takes on a role previously done under an umbrella and tries to pass it off as outside IR35.”

Another IT contractor said they were currently working two different roles – one of these roles has been assessed as being outside IR35, while the other “probably would have been assessed as outside”, but is through an umbrella.

“I see no reason to change [my working setup in the wake of the repeal], but I expect the umbrella role will be replaced with a PSC contract to save money, because my rate is higher than typical to account for the tax paid through the umbrella,” said the contractor. “If this happens, I expect I will say goodbye, as I wouldn’t want to risk HMRC thinking the contract should be inside IR35.”

IR35 Shield’s Chaplin said contractors should use the time between now and April 2023 to swot up on how the original IR35 rules work and seek professional advice before making any changes to their working practices.

“HMRC has much more data and tools available to crack down on tax avoidance and will continue to enforce IR35 from 2023,” he said. “But beware, if off-payroll goes, IR35 in its original form will be revived and return much more potent… and enforcement is inevitable.

“I would urge contractors to educate themselves on the original IR35 legislation and conduct their IR35 assessments to know that they are operating ‘outside IR35’ and pay the correct tax.

“Stay informed and be prepared – and be sure to obtain a tax investigation service to defend themselves should HMRC come knocking.”

Risk-averse enterprises

It is also worth noting, said Osborne Clarke’s Barrow, that while the contracting community might be itching to get back to providing their services through their own limited companies again, the PSC hiring bans introduced by some enterprises and public sector organisations in response to the reform might remain in place post-April 2023.

“We expect some sectors and types of company to be more risk-averse than others,” he said. “HMRC is already in regular contact with the tax directors of the top 100 employer organisations in the UK to remind them about labour supply chain risks under a variety of legislation, not just IR35.  

“Typically, smaller businesses may be more inclined to ‘get back into the water’ – they will have a greater appetite for risk. Once those less risk-averse organisations start hoovering up talent, we may see, with time, larger and more risk-averse companies rethink their policies to allow more PSC contracting.”

Even so, Barrow does not anticipate that, should the repeal come into effect, that there will be as many PSCs in operation post-April 2023 as there were before the reforms were first rolled out.

“If the repeal does come into effect, there is unlikely to be a full rebound to the previous levels [of active PSCs],” he said. “Some end-users will not, at least initially, abandon the new general anti-PSC stance. Others will be fearful of other anti-tax avoidance legislation and put in place policies that do not allow use of PSCs in all circumstances.”

These other forms of legislation include the Criminal Finances Act 2017, which obliges companies to take reasonable action to prevent tax evasion occurring in their supply chains.

Barrow added: “Many [end-user organisations] will have contractors in projects in which an inside determination has been issued and it may be hard for the end-user to accept them operating as PSCs until that project is done or materially changed for fear of seeming to be involved in facilitating tax evasion or in some way breaching anti-avoidance rules.

“But certain types of contractor may be allowed to come back on a PSC basis where there is obvious independence in how they operate.”


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