Government’s Growth Plan: Off-payroll working rules to be repealed
On 23 September 2022, the government revealed its Growth Plan and confirmed that the off-payroll working rules will be repealed for both public and private sector organisations with effect from 6 April 2023.
From that date, where an individual in the UK provides services through an intermediary (usually a “PSC” – a personal service company), it will be the PSC’s responsibility to determine the individual’s employment status and to account to HMRC for the correct amount of income tax and national insurance contributions if applicable.
What are the off-payroll working rules?
For tax purposes, an individual may be either employed or self-employed. IR35 legislation introduced a set of rules designed to prevent a type of perceived tax avoidance whereby an individual “contractor” working for an organisation in the same way as an employee would seek to avoid paying income tax and national insurance contributions by supplying their services through a PSC.
If the IR35 regime applies, the effect is that if the individual would have been an employee of the organisation (the “end client”) if not for the PSC, the fees received from the end client must be treated as the individual’s salary and taxed accordingly.
The off-payroll working rules are part of the IR35 regime and apply where the individual’s PSC supplies the worker’s services to public sector clients or medium or large private sector clients with a UK connection. They shift the responsibility of determining the individual’s employment status to the end client rather than the PSC.
The off-payroll working rules came into force in 2017 for public sector organisations and in 2021 for medium to large private sector organisations.
The aim of these rules was to improve compliance with the IR35 regime.
They place a considerable burden on the end client and have been received with some criticism due to the likelihood that end clients are being overly cautious in their employment status determinations so as not to contravene the off-payroll working rules.
What will the repeal mean?
As part of the Growth Plan, the off-payroll working rules will be repealed with effect from 6 April 2023. The IR35 regime will still exist after that date but the PSC (so in reality, the individual) will be responsible for determining whether the individual would have been an employee of the end client if not for the PSC and, if so, for deducting any income tax or national insurance contributions from the fees paid by the end client.
Nothing will change until 6 April 2023 and, in the meantime, end clients will still need to ensure compliance with the off-payroll working rules.
Even after 6 April 2023, businesses still need to consider other risks associated with engaging individuals as contractors but treating them as employees, both from a tax perspective and an employment law perspective. We consider these risks in our recent article, Keeping the status quo: the Government confirms that it will not reform the law on employment status.