The repeal of the off-payroll working rules in the private and public sectors from April 2023 has been announced by the UK government as part of its plan for growth. 

On the face of it, this will be good news for many suppliers (staffing intermediaries) and end-users of contractors, who will see this as a welcome removal of the significant administrative burdens and tax risks associated with the current rules.  

Many contractors will similarly see this as good news and an opportunity to supply their services in a way that increases take-home pay. 

If this repeal is enacted, the volume of personal service company (PSC) contracting arrangements will undoubtedly rise again after April 2023, especially given that the cost-of-living crisis will incentivise contractors and end-users to maximise take-home pay and minimise costs. But we believe it may not be quite the avalanche that many might imagine, especially for certain types of roles and in certain industries. 

Factors that might slow the revival of PSC contracting 

If the repeal does in fact happen, it is likely that there will be an increase in the use of PSC arrangements by contractors and that end-users and staffing intermediaries will permit supplies by contractors using PSC arrangements.  

But there are a number of reasons a return to the widespread use of tax-efficient PSC arrangements may not be straightforward in all cases. 

Risk that some contractors will be semi-permanently “branded” inside IR35 so it will be hard for them to return to PSC contracting 

The repeal will lead to a return to the IR35 regime under which the PSC will be responsible for determining the tax employment status of contractors and filing tax returns accordingly. The reason for the move to the 2017 and 2021 off-payroll working rules was that it had become hugely burdensome for HMRC to pursue PSCs on a contract-by-contract basis in respect of any status decision by a PSC it did not agree with. Often the value of the tax and NICs recovered from a PSC would be less than the cost to HMRC of the legal proceedings taken. It had become an uneconomic tax to collect. That is why the off payroll working regime passed liability up the chain, so that end-users and staffing companies were made liable for the tax and effectively enforced compliance by banning any supply arrangements they were nervous about. This “compliance from the top” effect of the off-payroll working regime will disappear if the 2017 and 2021 rules are repealed. 

However, end-user status determinations issued recently and in the period to April may have a “hangover” effect for some time after the legislation is repealed. In the year or two after the repeal, HMRC may have an easier job taking action against many PSCs because end-users will have placed on the record (in their so-called “status determination statements”) their view as to whether a particular role is or is not “really” self-employed. It may be difficult for PSCs to mount effective defences if they receive IR35 assessments (with threats of high penalties for carelessly or deliberately misleading HMRC) for the period after April 2023. We know that many contractors will be worried about that potential liability. 

Much business planning will need to be done to minimise risk in this area if PSC arrangements are going to return safely for certain types of role, particularly roles which have been clearly determined as being deemed employment.  

Potential criminal liability risk for end-users where contractors revert to PSCs 

The Criminal Finances Act 2017 obliges companies and partnerships to take reasonable steps to prevent the facilitation of tax evasion in their supply chains. If they do not, and there is tax evasion in that chain, they face prosecution for a corporate criminal offence, the penalty for which is an unlimited fine.  

Also relevant to supply chain tax arrangements is the older offence of conspiring to cheat the public revenue, which is a statutory conspiracy contrary to section 1 of the Criminal Law Act 1977. 

It is widely considered that the main reason most contractors would want to operate via a PSC is to minimise tax (particularly NICs). Will a clear (pre-2023) end-user determination that a role was deemed employment (and therefore not to be performed by a contractor using a PSC arrangement), or blanket ban of PSCs for certain roles, be evidence that all involved are aware of the fact that a contractor carrying out the same role via a PSC after April 2023 would be deceiving HMRC as to their true tax status? By allowing that PSC arrangement to be used, will the end-user and any relevant intermediary be failing to prevent the facilitation of tax evasion or (if there have been supply chain cost savings to their ultimate benefit) conspiring to cheat the revenue?. 

It will be interesting to see how these factors will play out in sectors like healthcare, IT, and financial services (where workers operated via PSCs on a widespread basis before the off-payrolling rules were introduced). Much business planning will need to be done to minimise risk in this area if PSC arrangements are going to return for particular roles. We believe some end-users will be nervous about this area of potential criminal liability. 

Many end-users have blanket-banned use of PSCs. Perhaps they will decide that they just cannot be bothered to undo that policy given the potential risks.  

In addition, in construction, repeal of the off-payroll working rules will still leave the supply chain with CIS rules to deal with. 

Potential tax risk for contractors using accounting services companies 

Of course, many contractors will be able to resurrect their old PSC or set up a new one without much assistance. However, in the past many contractors have used specialist accounting service businesses to help set up and administer their PSC arrangements. Those businesses offer cost-efficient online services, and we can see that this will be attractive to many contractors.  

The trouble is that HMRC is currently attacking some of the arrangements operated by these specialist accounting businesses. It is using the managed service company (MSC) legislation to make all PSCs who (in HMRC’s view) have used a specialist service provider to facilitate their use of PSC arrangements, liable for employment taxes. HMRC can use this MSC regime even if the contractors are, for the purposes of normal employment status tests, genuinely self-employed. It can do this because the MSC regime focusses on whether the contractor has been helped with the running of their PSC company rather than whether they pass or fail employment status tests. 

Repeal unlikely to be retrospective  

At this stage it does not look like the repeal will be retrospective and so the tax years 2021/22 and 2022/23 for private sector end-users, and the last six tax years for supplies to public sector end-users, will still be subject to the current regime. Suppliers and end-users of contractors should therefore remember that the off payrolling regimes will be in force until the repeal takes effect in April 2023. They should not unravel their current arrangements until then, keeping their assessment and warranty and indemnity protocols.  

End-users that have made (or make) deemed employment determinations should expect to see an increase in disputes about those determinations.  

In coming months, a lot of planning will need to be done to prepare for the new world, for example, relating to projects which may straddle the date of repeal.  

What, of course, will be interesting to see is the extent to which HMRC seeks to enforce the current regime. Our bet is that major breaches will definitely still be pursued. (Buyers of private sector end-users will therefore continue to ask questions about, and seek warranty and covenant protection for, material off-payroll regime risks for tax years 2021/22 and 2022/23). Additionally, there may be a new government (with a new set of policy objectives) before HMRC is out of time to bring claims relating to the current and recent tax years, and that may lead to a flood of claims relating to those periods at a later date. 

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