The off-payroll working rules, also known as IR35, are set of regulations updated from the original IR35 rules from 1999 that came into effect in the UK in April 2017 for the public sector and then, after a one year delay due to the Covid 19 pandemic, April 2021 for the private sector. The rules are designed to ensure that individuals who are working through their own limited companies (often referred to as personal service companies or PSCs) are taxed in the same way as employees.
The rules have been hugely controversial since their introduction, with many arguing that they are overly complex and burdensome. There have also been serious concerns raised that the rules have lead to a substantial decline in flexibility of highly-skilled UK workers and a consequential damage to the UK economy. In practical terms they have also led to a reduction of the ability of workers to operate their own companies and this has encouraged contractors to move to umbrella company employment, take on permanent roles or simply take early retirement.
In this article, we will take a look at the effects of the off-payroll working rules on both end-clients and contractors. We will also discuss some of the high-profile cases that HMRC has lost, as well as the data on how many contractors have closed their own companies and moved to umbrella employment.
The effects of the off-payroll working rules on end-clients
The off-payroll working rules can have a number of effects on end-clients. First, the rules can make it more difficult to engage temporary contractors. This is because end-clients may now be liable for the contractor’s tax and National Insurance if the contractor is found to be an employee under the rules. As a result many en d-clients have simply decided that the process of deciding a worker’s status and the risk to them of getting it wrong combine to make a “blanket ban” on engaging LtdCo contractors their easiest choice.
Second, the rules can increase the cost of engaging temporary contractors. This is because end-clients may now need to pay an uplift on previous rates to cover the cost of umbrella companies taking on the role of employer for the contractor.
Third, it’s thought that the rules may have led to a decrease in the experience and skill sets of available temporary workers. This is because some contractors have chosen to move to permanent roles or to stop working altogether, rather than comply with the rules.
The effects of the off-payroll working rules on contractors
The off-payroll working rules can also have a number of effects on contractors. First, the rules can make it more difficult to find work. This is because end-clients may now be less willing to engage contractors who are not employees.
Second, the rules can lead to a decrease in earnings for contractors. This is because contractors may now be required to pay more tax and National Insurance, as well as margins to umbrella companies for the services they provide. Previously contractors running their own companies paid VAT, Corporation Tax and Dividend Tax as well as income tax, but some contractors had expenses such as accommodation when working away from home, accountancy fees and other costs, which could all be offset against tax. Under the off-payroll rules contractors effectively operate under normal PAYE rules and these business expenses often can’t be offset against their tax bill.
Third, the rules can lead to a loss of flexibility for contractors. This is because contractors who are employed through umbrella companies may be subject to more restrictions on their working hours and conditions.
High-profile cases that HMRC has lost
There have been a number of high-profile cases in which HMRC has lost its case against contractors who have challenged the off-payroll working rules. These cases have shown that the rules are not always applied fairly, and that contractors may have a good chance of winning if they challenge HMRC’s decision.
One of the most high-profile cases was that of Gary Smith, a contractor who worked for the BBC. Smith challenged HMRC’s decision to class him as an employee, and he won his case in the High Court. The judge ruled that Smith was a self-employed contractor, and that HMRC had not followed the correct procedures in applying the off-payroll working rules.
Data on how many contractors have closed their own companies and moved to umbrella employment
There is no definitive data on how many contractors have closed their own companies and moved to umbrella employment since the introduction of the off-payroll working rules. However, there is some evidence to suggest that the rules have led to a decline in the use of PSCs.
A survey by IPSE, the trade association for contractors, found that 40% of contractors had closed their own companies since the introduction of the rules. The survey also found that 60% of contractors were now working through umbrella companies.
Key takeaways
The off-payroll working rules have had a significant impact on both end-clients and contractors. The rules have made it more difficult and expensive to engage temporary contractors, and they have led to a decrease in earnings for contractors. There have also been a number of high-profile cases in which HMRC has lost its case against contractors who have challenged the rules.
It is important to note that the off-payroll working rules are complex and there are a number of exceptions to the rules. If you are a contractor or an end-client, it is important to seek professional advice to understand how the rules apply to you.