IR35 - Where are we now?

IR35 

Where are we now? 

History  

On 9 March 1999, The Inland Revenue (now HMRC) issued press release IR 35. The Labour government had expressed concern that some individuals were working in the manner of traditional 'employees', but were paying less tax and national insurance by setting up their own limited companies ( also known as Personal Service Companies - PSCs) through which they provided their services. 

'IR35′ became law in July 2000 and was created to prevent individuals from taking dividends from their PSCs while avoiding paying national insurance on those dividends, rather than being taxed on their "full employment" income as if they were an employee. At this time, there were also a large number of umbrella companies that relied on the provision of Employee Benefit Trust (EBT) schemes, which allowed contractors to further reduce their tax liability, in some cases to rates of under 5%. 

In March 2011, the coalition government issued an interim report putting forward various proposals to overhaul the IR35 regulations. However, Chancellor of the Exchequer George Osbourne elected to keep IR35 in force, as there were concerns that its abolition could result in a significant shortfall of NIC receipts from umbrella companies. 

Further "protections" and clampdowns were introduced during 2015 and 2016, the combined result of which was that, from April 2017, public sector bodies are responsible for determining whether IR35 catches contractors or not. To aid them in this, HMRC released an online employment status tool. Unfortunately, this has been poorly implemented, and the results do not appear to reflect the reality of contractor assignments. Similar provisions were rolled out to the private sector in April 2021, despite the confusion which had arisen within the public sector. 

Does the introduction of the off-payroll workers’ legislation mean an end to IR35 investigations? 

When introducing the off-payroll workers’ rules, HMRC assured taxpayers that they would not launch enquiries into PSCs unless foul play was suspected. Consequently, many contractors felt safe from potential IR35 enquiries.  

Unfortunately, things have not turned out to be so clear cut, and HMRC may still have a few tricks up their sleeves which allow them to investigate the PSCs, irrespective of any earlier promises.

It is being reported that HMRC has started to initiate PAYE checks on contractors and their PSCs, most recently in September 2019. HMRC's enquiries begin with a softly worded letter asking for confirmation of certain aspects of the company's payroll. This directly allows HMRC to see how the directors have been paying themselves - either via salary, dividends, or a mix of the two, which in turn could cause HMRC to open an IR35 enquiry as part of a PAYE compliance check. We would assume that HMRC would not see this as breaking any promises as, technically, it started with a PAYE check.

It may seem improbable that an IR35 check would begin this way, given that the introduction of the off-sector rules from April 2021 seem to have shifted the tax liability from many PSCs. However, a retrospective PAYE check that covers pre-April 2021 could very realistically land the PSC in an IR35 enquiry where they are held to be liable.

Although we must stress that at this time there are only a couple of active enquiries, and they may not even develop into full-blown IR35 investigations,  the introduction of PAYE checks into PSCs after nearly a decade of silence  is not something which should be ignored. 

Any contractor receiving such a letter would be wise to seek proper advice and treat any answers as if they were to become evidence in an IR35 case.  

The Loan Charge  

Thousands of contractors are now finding themselves with potential tax liabilities in the tens of thousands due to their involvement in EBT schemes provided to them by promoter companies or their own accountants.   

HMRC introduced a provision in Finance (No. 2) Act 2017, the "Loan Charge", to tax those loans outstanding on 5 April 2019 as income, seemingly disregarding provisions made in April 2011. Which excluded loans made before December 2010 from tax liability. For those affected, the impact of the Loan Charge was significant, and, in some cases, financially ruinous, with multiple groups lobbying the All-Party Parliamentary Group to have this legislation struck out or amended.  

Following an independent review by Sir Amays Morse in late 2019, HMRC reluctantly amended the Loan Charge Legislation in July 2020 to exclude any loans made before December 2010. 

Unfortunately, this does not mean that contractors are off the hook, as shown by the softly worded update letters issued this year inviting individuals to settle and pay tax on these pre-2011 loans.  Along with HMRCs ability to continue any already active enquiries.

HMRC has issued thousands of notices to contractors under s9A, relating to loans made after 2011, which, in HMRC's opinion, should have been included as income in the individuals’ 2018/19 tax returns. Many if not all of these enquiries are still ongoing due to the delays caused by COVID.

Commentary 

IR35 is a financial minefield. For those clients with EBTs which can or have been paid off, changes to the legislation catch any subsequent payments as income. For others who have pre-2011 loans, there is uncertainty as to what will happen next.  

Those who have received post-2011 loans either via an employment scheme or sole-trader route will undoubtedly soon be receiving follow-up letters from HMRC relating to the enquiry notification letters issued earlier this year.  

The above article is for informative purposes only and should not be taken as advice. If you have been affected by anything which has been discussed above, please give us a call to discuss how we might be able to assist you.