Since April 2021, medium and large private organisations have been responsible for determining the tax employment status of people who work for them through an intermediary.
IR35 is a rule that seeks to combat tax avoidance by workers (and the firms that hire them) who supply their services through a one-man company, but work in a manner akin to a traditional employee.
Known as “disguised employees”, if they are caught by IR35, they have to pay income tax and National Insurance contributions as if they were employed.
A year on from the implementation of IR35 in the private sector, criticism of the scheme has come from both the National Audit Office (NAO) and House of Lords.
So, following on from their recommendations, what does the future look like for IR35?
IR35: the story so far
The Blair Government first introduced IR35 back in 2000, with the aim of preventing tax avoidance by disguised employees by requiring them to determine their own employment status and report it accurately.
However, it was difficult to enforce, so in 2017, the “off-payroll reforms”, also referred to as IR35, required public bodies to determine the employment status of third party workers.
Similar changes were then rolled out in the private sector in April 2021, requiring medium and large businesses to determine their workers’ tax status.
A “soft-landing period” applied, however, which meant no fines would be handed out for non-compliance with IR35 rules up until 6 April 2022.
What did the House of Lords and NAO say?
The NAO’s report concluded that, although the 2017 regulations reduced non-compliance and raised additional tax revenue, they were rushed and difficult for public bodies to implement.
This made it “highly likely” mistakes would be made, the NAO said.
It added some of these lessons were applied to the 2021 reforms, as HMRC gave businesses more time to prepare and support to comply.
However, inherent differences between the public and private sectors mean HMRC will have “new risks” to manage, making it potentially harder to identify, monitor and address non-compliance.
In its follow-up inquiry, the House of Lords said the extension of the rules in 2021 appeared to have been mainly in response to the use of umbrella companies.
The number of individuals using these companies had already risen from an estimated 100,000 in 2007/08 to 500,000 in 2020/21, and evidence suggests this trend is continuing, despite the implementation of the rules.
The sub-committee said it was “very concerned” by this, as it increases the risk that workers will become involved with “rogue” companies operating tax avoidance schemes.
The future for IR35
In it’s report, the House of Lords committee recommended the Government take a “more coherent approach” to the issue of employment status, including both tax and employment rights.
It said it is “unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment”.
To address this, it said the Government should implement the proposals set out in the 2017 ‘Taylor Review of Modern Working Practices’, which gives a clue as to a possible future for IR35.
As alluded to earlier, April 2022 marks the beginning of penalties against private companies who are found to be breaking IR35 rules by incorrectly stating their contracted worker’s employment status.
A penalty of 30% of unpaid tax will be due if HMRC deems you were careless about your employment status and 70% of unpaid tax if you were within IR35 but chose not to act.
IR35 is complicated and easy to get wrong. Get in touch with us to discuss how it works and what your obligations are.