‘Tax advantage’ of limited companies potentially returns – and with it, problems for lower paid agency workers

Prior to the 2017 and 2021 off-payroll working rules, lower paid agency workers being put in to limited companies was the norm¹. This used to save some money within a supply chain but created significant problems for workers. With the Chancellor’s announcement today that the 2017 reforms, and an extension to them made in 2021, will be repealed from April 2023, those days look set to return, LITRG is warning.

Kwasi Kwarteng’s Growth Plan sets out that the 2017 and 2021 reforms which introduced the current off-payroll working rules will be repealed from 6 April 2023². From this date, workers providing their services via a limited (Ltd) company will once again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance contributions (NICs). These rules are commonly known as IR35 - and were sometimes ignored - giving people who looked like an employee but worked through a Ltd company a tax advantage over normal employees.

LITRG warns that unless this announcement is coupled with a commitment from HMRC to enforce anti-avoidance legislation around Ltd companies properly, the days of disregard for the rules - fueling the use of ‘agency worker’ limited companies to increase profit and reduce obligations within a supply chain - look set to return.

The group are also pointing out that when lower paid agency workers have a limited company that they don’t really understand, it can leave them with messy and expensive compliance issues that can follow them around for years and years.

Meredith McCammond, LITRG Technical Officer says:

“Prior to the 2017 and 2021 off-payroll changes, many lower income agency workers often found themselves offered work on the basis that they would provide their work through their own limited company. This was usually at the behest of an agency or other intermediary, such as an umbrella company, who could then save on employer NICs and could also charge an ongoing fee for ‘accountancy’ services to help the worker run the company.

“The off-payroll rules weren’t perfect, but they did remove this incentive.

“Once limited companies start being set-up for low paid agency workers again, huge difficulties await if a compliance issue arises, the accountant stops providing support or it needs to be shut down.  Those at the lower-income end of the spectrum who find themselves working through limited companies usually have very little understanding of how such legal entities operate. They often cannot separate out their own affairs from those of the company, and stand very little chance of handling their tax affairs correctly, let alone dealing with the Companies House requirements.

“HMRC must make it clear from the outset that they plan on enforcing the anti-avoidance legislation around Ltd companies properly which would act as a serious disincentive to those considering gaming the system by setting up limited companies for lower paid agency workers. HMRC must be given the appropriate resources to act, as without doing this, it is likely that the low-paid will be significantly disadvantaged by today’s changes.”

Notes for editors

1. We explain this further in our website guidance.
2. The off-payroll rules mean that if a person is working through their own limited company (ltd) in the public sector or for large or medium private sector entities then they are no longer in charge of determining if the intermediaries legislation (commonly known as IR35) applies. The ‘IR35’ determination now falls to the public or private  body and if it applies, Pay As You Earn (PAYE) tax and National Insurance contributions (NIC) are withheld at source on any payments to the ltd.