Mini-budget: Recruiters give nitty gritty on changes to IR35 and MSC legislation

As the dust settles from Friday’s announcement [23 September 2022] by Chancellor Kwasi Kwarteng that changes were imminent to the controversial IR35 legislation, industry commentators are weighing in on what actually will change.

Some experts are cautiously predicting a shrinkage of umbrella companies in light of a planned rollback of the Off-Payroll Working Rules of 2017 and 2021.

Dave Chaplin, CEO of IR35 Shield and one of the foremost IR35 experts, told Recruiter: “It’s important for contractors to fully understand that IR35 has not been fully repealed. The chancellor repealed the failed Off-Payroll Working Rules, which were introduced to the public sector, and extended to the private sector from April 2021, for medium and large companies.

“The existing rules, the Intermediaries Legislation, have been in place since April 2000 and from April 2023 will still apply. From April 2023, contractors who work via limited companies are responsible for assessing their own status, and the tax liability sits with them.”

However, Chaplin warned there was a much bigger threat than HM Revenue & Customs’ likely restart to enforcing IR35 again (having paused since April 2017): the Managed Service Company Legislation (MSC), which has recently affected 2,000 contractors. “Under this legislation, HMRC can chase contractors personally for more tax, irrespective of the IR35 status of their engagement. Contractors will need to ensure they are not involved with an MSC provider,” Chaplin said.

Asked what will happen in the world of umbrella companies following Friday’s announcement, Chaplin said: “In my view, the market for umbrellas will likely shrink, close to similar levels of usage before Off-Payroll. Agencies will no longer be able to insist on the use of an umbrella, because the contractor will simply refuse, and instead use another agency to find an engagement on the terms they want.”

He went on to say: “The consequence is that use of umbrellas is likely to become a choice, driven by contractors who have a genuine need to use one. And for many contractors, on the lower end of the pay scale, where contracts are short-lived and across many different agencies, an umbrella would be advantageous.”

Also commenting to Recruiter was Chris Bryce, CEO of the Freelancer and Contractor Services Association: “While IR35 is very much still there, reverting to the original version is at least a step in the right direction and will restore the much-needed flexibility and agility that benefits the UK economy so greatly.”

He also issued a note of caution, saying: “This is great news for those workers who want to choose their own path and at least goes some way to undoing the damage caused by IR35 mark II. However, it remains to be seen if end-users will rapidly return to engaging contractors via limited companies, with them perhaps waiting to see what the overall market does.”

He added: “Another issue is that a large number of contractors will be unable to quickly re-establish their businesses having closed them down as a result of the earlier government policy mis-step. There are tight regulations about this, and I strongly advise contractors to get advice from their accountants before they try to move forward. 

“FCSA does expect to see a movement back from umbrella employment to independent limited companies, but I suspect that this will be gradual rather than speedy. Many FCSA accredited members provide both accountancy and umbrella services and I’ve no doubt that they’re in a great position to advise workers of the best options.”

A consultant for the financial services industry has said the repeal of restrictive IR35 rules will help to create “a far more entrepreneurial, flexible and highly motivated economy that is attractive to workers and investors” without the “constant fear of investigation”.

However, Martin Hartley, managing director of emagine, a management and technology consulting firm for the financial services sector, also expressed surprise that such a major U-turn could be introduced “without any public consultation”.

Hartley, whose consultancy operates in 24 locations across Europe, including London working with HSBC, Credit Suisse and tier one investment banks, said: “Considering they downplayed the announcement from a Budget to a mere ‘fiscal announcement’ (it was more one of the biggest budget announcements we’ve seen in 12 years of Tory rule), [Friday] was quite a historic moment.

“To U-turn any unfavoured legislation is a big event, but to reverse it with no public consultation is unheard of.”

Hartley said the legislation had been “deeply unpopular” from its inception for placing the burden on employers, and its reversal would also conversely boost and open up many consultants’ work options.

“When they introduced this legislation the responsibility on determining tax status became the end-client’s responsibility. This didn’t work very well – it only placed costs and burdens on the end-client and affected businesses’ performance significantly,” Hartley said.

“As a result, top banks and financial services firms took a risk-averse decision with IR35 foreseeing the risks and imposing a blanket ban on working with contractors.

“Why on earth would they want the worry of an HMRC investigation when nine organisations in the public sector are facing nearly £300m tax liability in relation to the legislation? The implications would be far more detrimental to the sector and economy as a whole.”

He added: “This U-turn is a welcome one. I expect banks will welcome engagement with contractors and it makes it easier to deploy consultants with niche skill sets more quickly now that the looming threat of investigation is eliminated – and this will create a far more entrepreneurial, flexible and highly motivated economy that is attractive to workers and investors. It’s a win-win situation for everyone in the industry.

“However,” Hartley added, “the government must offer clarity and a robust roadmap on the changes. Education to clients, contractors and firms must be thorough to ensure the UK’s businesses aren’t hit with any surprises or fines later down the road.”

Also commenting was Crawford Temple, CEO of Professional Passport, who said the future for umbrellas was not quite as bleak as some might imagine: “Umbrellas existed long before Off-Payroll and while many contractors will return to operating through their own limited companies many will still continue to use umbrellas; it suits their requirements,” he said. “The key aspect of the change is that the choice of operating structure has been handed back to the contractors.”

He emphasised: “The government urgently needs to press HMRC to provide detailed guidance, on the back of today’s announcement, relating to the application of the MSC Legislation. I would go further and suggest a review of both IR35 and MSC Legislation needs to be carried out urgently so that contractors are not inadvertently operating under schemes that would apply full PAYE to their income from April.”

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