Spring Statement 2022 suspected to start extending IR35 reform to 'small companies'

Spring Statement 2022 could be used to extend the divisive IR35 off-payroll rules of April 2021 to PSC contractors who supply ‘small companies.’

Graham Webber, tax director of WTT Consulting believes the extension of the framework which currently applies to PSCs supplying large and mid-sized firms, is a “done deal.”

A self-diagnosed “cynic,” Mr Webber says HMRC using its research to hail the new rules “a huge success” is a sure sign of their extension to small companies “within a year or so.”

'Rolling out the new IR35 rules to small companies'

But it’s partly its newness which makes a status expert say the chancellor extending the 2021 framework to all clients of Personal Service Companies on March 23rd would be premature.

“I don’t think the government will be rolling out the new IR35 rules to small companies next week, simply because of the flack that HM Treasury and HMRC are getting from all sides.”

The expert, Bauer & Cottrell co-founder Kate Cottrell continued: “Lessons from the public sector 2017 rollout still very much need learning. Just ask the PAC, the NAO, and the Lords.”

'One day it'll be small companies, but not yet'

Backing her assessment (“one day small companies will be covered but not yet”), HMRC has said -- five times no less -- that it is “too early” to assess the 2021 rules properly.

But ex-tax officer Carolyn Walsh fears her old bosses will at least want to get the ball rolling, even if they will have to feign being more consultative due to the criticisms of the rules.

Director of CWCAS, Walsh said: “My suspicion of Spring Statement 2022 is that it contains a consultation on extending the scope of the revised IR35 legislation to include all businesses.

“Yet that’s not to say a universal application -- to all limited company workers’ clients, will be a foregone conclusion. That’s what prior consultations seem to have been however.”

'Scare a lot of small businesses'

Also formerly of the Revenue, Cottrell agrees that HMT planting the seed that small firms face being covered by 2021’s IR35 rules would please HMRC, especially if it boosts CEST.

 “If you want to scare a lot of small businesses enough to use your tool, or services, start shouting it now,” she said, almost as if advising her old employer.

“Overall though, I see any [off-payroll rules’] extension to small companies as a few years off. Don’t forget, the ‘party of business’ will want to win the next general election.”

'HMRC probing medical giant over IR35 shows it's not holding back'

Spring Statement 2022 may offer other IR35 detail -- yet similarly, the remedial kind seems unlikely even though peers have explicitly recommended HMRC make revisions to the rules.

Genie Accountancy’s COO Helen Christopher says: “We may see a mention on Wednesday of IR35 reform’s ‘soft landing’ ending, [cueing up] increased HMRC compliance activity.

“Contractors and their end-clients need to be aware of this ending. We have already seen HMRC recently open enquiries at a large private sector end-client in the medical sector.

“And HMRC is already not holding back. It may be only one enquiry at one client, but HMRC can cast its net far and wide across the many, many contractors engaged by the firm.”

'Bordering on the obscene'

Details on the Single Enforcement Body to regulate umbrella companies are also expected at Spring Statement 2022.

But unlike an IR35 consultation on extending the 2021 rules to small companies, the SEB is an announcement from the chancellor which advisers actually want to hear.

At ICAEW member firm CWCAS, Ms Walsh says: “The SEB underpins everything the government adopted following the Good Work report and its set-up was announced in 2019.

“Notwithstanding delays caused by the coronavirus pandemic, if a launch date for the body isn’t announced at Spring Statement 2022, it’ll be bordering on the obscene.”

'Dare to be brave, chancellor'

Fellow former tax inspector Kate Cottrell reassured: “I do think Spring Statement 2022 will contain a date for umbrella company regulation.

“The government  simply cannot ignore the enormous compliance risks any longer -- or indeed the unfairness.

The IR35 specialist added: “But the trouble with the SEB is that it will take time. Nonetheless, Spring Statement is a real opportunity to sort out the umbrella industry and I hope government will dare to be brave enough to make some radical changes for the benefit of brolly users, especially all those contractors forced to work within umbrella companies.

“And ideally, we need one of those ‘from midnight tonight’ provisions from the chancellor, thereby giving the unscrupulous nowhere to hide -- and no time to change their practices.”

'Level playing field for all umbrella companies'

Perhaps surprising, given it itself is an umbrella company, Clarity Umbrella could hardly sound keener to have Spring Statement 2022 inflict new regulations on its type of business.

“Our genuine wish is for a level playing field for all umbrella companies to operate compliantly,” began Clarity’s managing director Lucy Smith.

“Those who aren’t operating compliantly and with contractors’ best interests at heart must be penalised, and those that are, must get access to working with any agency and any contractor.

“Ideally, regulation via the Single Enforcement Body would also stop contractors from being forced into employment with a company they have absolutely no desire to be employed by”.

'Contractors are going to have to brace themselves for higher tax'

The government’s other already-tabled measures for UK contracting look set to get nodded through at Spring Statement too, putting big dents in contractor take-home pay.

“People are calling for the NI and dividend tax increase to be scrapped but I can’t see that happening,” predicts Genie Accountancy’s Ms Christopher.

A chartered accountant, she added: “Like everyone else, I fear contractors are going to have to brace themselves for increased taxes, and a higher cost of living.”

'Scrap NICs hike, rethink dividend tax increase'

“The cost of living crisis will no doubt be one of the main talking points in next week’s Spring Statement,” confirms Qdos CEO Seb Maley.

“One way to relieve some…of the financial pressure that the self-employed, employees and employers face is by scrapping the incoming hike to NICs. 

“Another is to rethink the dividend tax increase. This is a major concern to freelancers, contractors and small business owners operating via a limited company.”

He asked online: “But will the government listen? Regardless of it clearly being the sensible thing to do given the circumstances, I’d be surprised if there [were] last minute U-turn[s].” 

'No chance'

Actually there is almost “no chance” of Mr Sunak not waving through already lined-up tax reform, including the April 2023 rise in corporation tax, believes Ms Cottrell.

“Many also have been asking for a delay to the NICs hike,” she said. “But the ask [of HMRC to employers and software providers] for messages to go on April payslips is well underway.”  

In the contractor sector, IPSE (the Association of Independent Professionals and the Self-Employed) has asked the chancellor to cancel next month’s 1.25 percentage points increase in National Insurance rates, as has the REC (Recruitment & Employment Confederation).

'Obvious step to extend new off-payroll rules to small companies'

But the association’s nemesis, IR35, is what one adviser says the taxman will invariably focus on next.

Asked about the prospect of ‘small companies’ as defined by the Companies Act losing their exemption from the April 2021 off-payroll rules, the adviser said: “It’s an obvious step for HMRC.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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