The government has announced that the IR35 tax reforms due to come into force on Monday 6 April 2020 will be deferred by one year to 6 April 2021.
The new rules will move the responsibility for determining the tax status of contractors, and operating PAYE, to the engaging client or agency but there was widespread concern regarding their introduction, as many businesses struggled to get the necessary processes in place in time. Contractors were similarly unhappy as many face higher tax bills under the new rules. Deferring the start date to 2021 is part of the government's package of measures aimed at helping businesses and individuals weather the economic impact of the coronavirus pandemic.
The delay gives businesses an additional year to prepare, which has been widely welcomed, but may also cause some practical issues for those who have already re-negotiated contracts, moved to different staffing models or made determinations as to status, whether formal or informal.
IR35 and the new off-payroll rules
The planned reforms are aimed at reducing the use of personal service companies (PSCs) in circumstances where they are used in place of direct employment contracts as a way of reducing tax.
Currently, in the private sector, it is the PSC that is responsible for determining whether the individual should fall within the IR35 rules i.e. that the relationship between engaging client and individual worker would be one of employer/employee were the PSC not involved, with the result that PAYE and NICs becomes due on all amounts paid to the PSC, and the PSC is required to account for that tax to HMRC.
The new rules will shift the responsibility for determining the status of the employee/employer relationship, tax deduction and reporting requirements from the PSC to medium and large clients in the private sector (and in some cases, agencies within the supply chain will become liable to make the relevant deductions of employment taxes), bringing them into line with public sector clients.
Despite widespread concerns that the new rules are uncertain in their application and HMRC guidance inadequate, the Chancellor confirmed in last week's Budget that the reforms would go ahead this April as planned. That Budget now seems a very long time ago and, in view of the overwhelming economic disruption caused by the coronavirus crisis, the government has sensibly postponed the IR35 reforms.
Implications of the delay
Contractors are welcoming the delay. The changes are significant both in terms of administrative process and financial (both cashflow and absolute) consequences for those expecting to be moved to employment status for tax purposes.
However, many private sector clients have already reviewed contracts and made status determinations in anticipation of an April 2020 start date. What happens now?
We understand that HMRC has said that SDSs will have no standing in law and will not be used as evidence in any enquiry dispute during the coming year, and this fits with HMRC's earlier statement that it will not use information resulting from changes to the off-payroll working rules to open a new compliance check into PSCs for tax years prior to the introduction of the rules, unless there is reason to suspect fraud or criminal behaviour.
However, the position as regards to existing SDSs is not part of current published guidance, and in any case it seems hard to imagine that HMRC would completely ignore a client's view – whether set out in a formal SDS or as part of a documented internal determination - that IR35 does apply to current working arrangements where the PSC continues to treat itself as outside the IR35 rules. It would, at the very least, indicate that there is significant doubt over whether the worker is truly self-employed. Contractors should be aware of this risk.
Similarly, businesses will need to be mindful of their own obligations to ensure, so far as possible, that they are not failing to prevent the facilitation of tax evasion in their supply chains by reason of turning a blind eye to a PSC which is treating itself as outside the IR35 rules, despite the business taking the contrary view.
Many contracts have already been re-negotiated and amended to give clarity to the tax status of the individual; often, this has involved payrolling all those previously operating as contractors. It is unlikely to be feasible to undo all of these arrangements given that the new off-payroll rules will still be introduced in a year's time.
Moreover, businesses should assume that – having been given an additional year's preparation time – they will not be afforded any leeway in the operation of the rules while these are bedding down, as had previously been promised by HMRC. This may mean that those employers that have already taken a decision to exclude all PSCs from their supply chains will maintain this position, in order to avoid any issues from engagements which may run past April 2021 but, in the current economic climate, others may relax this rule if it saves additional cost.
Overall, this is a positive move for contractors and businesses alike, albeit that there will be decisions to be made on whether to push forward with planned changes to staffing arrangements, backtrack on any changes made or hold fire until the position is more settled.
We have given only an overview here of the potential implications of the delay to the IR35 reforms. Please do not hesitate to contact us to discuss your specific circumstances.
