New IR35 risks explained

Risks remain for construction firms despite surprise move to scrap IR35 reforms

The government’s surprise decision to scrap recent reforms to IR35 is welcome news for the construction industry, it removes a layer of risk and complexity that should never have existed in the first place. However, firms and freelancers using limited company status to sell their services should be careful to maintain a consistent approach to employment status because risks remain, and IR35 could still disrupt supply chains. All that has happened is the party shouldering liabilities has changed from the end user to the limited company contractor.

Chancellor Kwasi Kwarteng announced the 2017 and 2021 changes to the off-payroll working rules, which placed the risk on end users, will be repealed from April 6 2023. This means anyone providing their services via a limited company intermediary (also known as a personal service company) will take back responsibility for determining their own employment status. They will be liable for paying backdated tax and National Insurance contributions should HMRC deem them employed for tax purposes.

The government said this would reduce the burden on businesses that engage contractors and minimise the chances that genuinely self-employed people are impacted by the rules. What they have not set out is what happens in future reclassification cases when engagements span the period during which the end user was liable. It is likely they still will be liable until the liability times out in April 2028.

Before the 2021 changes were implemented, we warned the IR35 reforms amounted to bad legislation and we have been proved right.

The House of Commons Public Accounts Committee found that HMRC rushed implementation, provided poor guidance and even government departments struggled to use the CEST tool to assess status. We also warned the reforms would promote the use of dodgy umbrella schemes. Six months after the 2021 implementation, the government issued a call for evidence on the umbrella company market, saying it was aware of concerns regarding non-compliance with tax and employment law. This was exacerbated by people moving into those schemes in a hurry because of IR35.

The cost of chucking the reforms in the dustbin is estimated at a whopping £6.2 billion to HMRC, spread between 2023-24 and 2026-27. The costs and disruption to businesses of implementing short-term legislation and then changing back again do not seem to feature in the government’s thinking.
 

So what does this mean for construction?

Most self-employed tradespeople already operate as sole traders and lots of construction firms were not caught either because they did not meet the £10.2m turnover test for the IR35 legislation to apply. The reforms mostly impacted the technical professions working for larger firms and other sectors of the economy such as banking and IT, but regardless we say good riddance to bad legislation. Let’s hope the VAT domestic reverse charge for construction also finds itself on the chopping board!