The government has announced that IR35 reform, extending the IR35 tax rules to medium and large private sector businesses, is being delayed a year to 6 April 2021.
The delay is part of a broad package of measures announced by the Treasury to protect the economy from the coronavirus (COVID-19) outbreak and aims to help business and individuals at this challenging time. Nevertheless, this is a welcome delay.
From 6 April 2021, the responsibility for making the determination will shift to the end client or hirer. The end client is obliged to pass the status determination (along with the reasons for it) to the next entity along from it in the supply chain, as well as direct to the worker.
If the arrangement is within IR35, the person paying the intermediary will be responsible for paying the tax to HMRC. The amount paid to the contractor is included when calculating the Apprenticeship Levy. The VAT exclusive amounts must be accounted for through Real Time Information (RTI), in the same way as for an employee.
The change applies to large and medium sized incorporated enterprises.
There is a client-led status disagreement process aimed at resolving any disputes around the determination status (sanction for non-compliance with the process is that the client becomes liable for the tax). There is also a measure aimed at preventing clients making blanket determinations.
Controversial but committed
The IR35 changes are controversial but the government confirmed that it was going ahead with the changes after its Review of changes to the off-payroll working rules. The House of Lords has also held a wide inquiry relating to the proposed extension of the off-payroll working rules to the private sector. The remit included the real-life experiences of individuals and organisations, as well as more general responses, for example, relating to the impact of these (and predecessor) measures on the tax classification of workers and the broader impact on the labour market. The deadline for submissions was Tuesday 25 February 2020 and the outcome is awaited.
However, the announcement from the Chief Treasury Secretary, Steve Barclay, made it very clear that the decision to delay IR35 was a deferral in response to the ongoing threat of COVID-19 and not a cancellation of IR35.
The government confirmed it remains committed to reintroducing the IR35 policy.
What to do now
Employers who receive services from individual workers through an intermediary need to ensure that they are ready to implement the changes before 6th April 2021. The delay to the implementation date is helpful because it allows a reasonable interval in which to properly consider and implement all the necessary measures. These considerations extend to resourcing strategy and processes as well as drafting of contracts. However, HMRC may be less lenient in applying penalties in the first year following implementation because there is now plenty of time to put the necessary measures in place.
This delay is a good opportunity to prepare thoroughly for the changes. The steps to take could include reducing the extent to which contractors are used in the business, perhaps reducing risk by taking on more workers who are dealt with by agency payroll under the agency rules or who are employed by an umbrella company. Some businesses will choose to use zero hours employment contracts.
Existing arrangements need to be assessed and contracts updated or terminated. Many businesses will update their processes for bringing in and working with contractors. Each business will have its own specific requirements to minimise IR35 risk and make sure they can deal with the necessary compliance in a streamlined way. Our specialist team assists at all stages of the process, from risk assessment to implementation.