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It is now over three years since changes to the administration of the off-payroll working rules (IR35) put responsibility for determining whether contractors they engage are in fact disguised employees for tax purposes onto medium-sized and large businesses. Public sector bodies had already taken on this responsibility for determining employment status from April 2017, but it remains with contactors or their intermediary when the engager is a small business. Since these changes, many engagers have struggled to determine whether or not a particular arrangement is ‘inside IR35’. In the same period, there have also been several high-profile court cases demonstrating the complexity of the underlying legislation.

Problematic legislation

In recent cases, even First-tier Tribunal judges that have considered the IR35 legislation have been found to have erred in law, and earlier this year the cross party Public Accounts Committee raised concerns about the impact of the IR35 rules on certain sectors, particularly the broadcasting sector, and the restrictions the rules are placing on people working as self-employed contractors. In the meantime, HMRC has seemingly ramped up its focus on off-payroll working compliance with many large businesses being asked to complete IR35 questionnaires as part of their HMRC Business Risk Review (BRR+) process. 

Whilst it is unlikely to be top of the current government’s priority list, it is clear that change is required. But the options seem limited.

Potential solutions

Back in 2017, as part of a government commissioned ‘Review of Modern Working Practices’, Matthew Taylor recommended a clearer outline of the tests for employment status through the introduction of primary legislation – in effect the creation of a statutory test which, despite not having been implemented, remains the obvious solution to many. It was also suggested at the time that there should be an alignment of the tests for tax (employed or self-employed) and employment law, (employed, worker or self-employed).

The government consulted on this, but in 2022 decided that the time was not right for change and instead vowed to explore longer-term options to improve the employment status system for tax to ensure it is as clear as possible. Other than some tinkering with the HMRC Check Employment Status for Tax (CEST) tool and some updates to HMRC guidance, there has been little evidence of any progress in this respect. 

Liz Truss’s short tenure as prime minister opted for a more direct solution, with then chancellor Kwasi Kwarteng announcing in his mini-budget speech in September 2022 proposals for the complete abolition of engagers’ obligations under the IR35 rules. Jeremy Hunt, however, rapidly reversed this barely a month later, and it seems an unlikely avenue for the new Labour government to pursue.

Whether the new government has any immediate plans to review the IR35 legislation remains to be seen, but there was nothing specifically mentioned in its pre-election manifesto.

What should businesses do in the meantime?

Whilst we wait to see if the new chancellor has any plans to improve the IR35 regime, those responsible for assessing employment status in off-payroll working arrangements involving intermediaries such as personal service companies (PSCs) should take note of the key points emerging from recent cases.

When making a status determination under the IR35 rules, it is necessary to consider the hypothetical contract that would have existed in a direct contractual arrangement for the same services between the engager and the worker, rather than just the actual written contract. As part of this process, the terms of the actual contract and the actual reality of the day-to-day arrangements need to be established to ascertain the terms of the hypothetical contract, which should then be assessed against the various status tests.

Whilst it is important to take into account all of the various status tests, the irreducible minimum tests around the extent of mutuality of obligation between the parties, the right of control over the working arrangements and the extent to which the contractor can be said to be in business on their own account are the current areas of focus.

There are further cases to be heard that will have a significant impact on the key factors to be considered in employment status tests going forward, not least the long-awaited Supreme Court decision in the case of Professional Game Match Officials Limited. 

For the time being, businesses should focus on the reality of the day-to-day arrangements when making status assessments and look out for any future announcements by the new government.

For more information, please get in touch with David Williams-Richardson or your usual 91探花contact.