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In case you missed it amongst all the other headlines, on Tuesday, 17 March the government announced its last-minute decision to postpone the implementation of the Off-Payroll changes, or IR35, that were due to be introduced on the 6 April 2020. The delay is to help businesses and individuals who may be struggling following the impact of Covid-19, but what should you do now? Will this help you, or is it simply too little, too late?
It is the most recent in a string of delays to proposed changes in Government policy, following the footsteps of Making Tax Digital (‘MTD’) roll out, Changes to VAT in the Construction Sector and of course Brexit itself, and it probably won’t be the last with the focus of Government shifting from Brexit to the Coronavirus.
What is IR35?
IR35, or Intermediaries Legislation, is used to describe the tax legislation designed to combat the tax avoidance by contractors/freelance workers and the firms that hire them, typically via an intermediary such as a limited company (sometimes called a ‘Personal Service Company’), who would be employees and pay tax via PAYE, were it not for the intermediary. These ‘deemed employees’ have to pay Income Tax and National Insurance, as if they were employees, if HMRC deem them to be within the legislation, which would have a significant impact on their incomes.
Whilst the legislation has been in place since April 2000, it is regarded as poorly conceived and badly implemented by HMRC, which causes unnecessary costs and hardships for other genuine businesses. The government therefore tried to refresh the legislation for the Public Sector in 2017 and this was proposed to be extended to Medium and Large firms in the private sector from April 2020, before it was delayed.
The private sector reform would have seen a shifting of responsibility for determining the tax status of the contractor from the service provider to the client business. If a contractor was considered a “deemed employee” the client business would then be responsible for processing payments through their payroll making all necessary tax and NI deductions rather than the contractor doing this themselves, unless of course they chose to operate through an Umbrella company.
Confusingly IR35 is used to refer to all this legislation, past, present and future.
When will IR35 take effect?
The rollout of this legislation to the private sector has been a contentious issue, met with much opposition from many sections of industry who were impacted. They feared that contractors would withdraw their services rather than be considered a ‘deemed employee’ and taxed through the client’s payroll or through an umbrella company as this would result in an effective 25% reduction in their pay. In some sectors the contractors can increase their rates by the same amount, so the net effect is neutralised, but this is unlikely to be an option for most, especially in competitive industries.
The postponement of the rollout of the IR35 changes to the 6 April 2021 will no doubt be welcomed as it’s surely hoped that this allows more time for a review of how the legislation is to be implemented, including how assessments for determining a contractor status is done.
It’s also widely being argued that the governments CEST tool, designed to help businesses and contractors assess their status, is not comprehensive enough to do a fair assessment. Whilst the latest release is an improvement on the first draft, it still does not cover all the fundamentals which HMRC use to make an assessment.
Too little, too late?
Whilst we welcome the delay as it will give us all time to re-assess the situation and work out what is best for our clients, if this had been changed six or nine months ago, this would be the headline winner. However, to put it simply this is too little too late for many contractors who have already lost their roles, been forced into PAYE positions and often otherwise being hounded by HMRC.
Even before the legislation came live, we saw massive changes in recruitment here, with several large companies including Barclays, HSBC, Lloyds and GlaxoSmithKline telling sub-contractors to go on payroll or leave. Research suggested that half of the contractors planned to leave clients in the last eight weeks up to the legislation coming live, effectively costing the UK economy £2.2bn, but even with only a few weeks to go, 28% of contractors were still waiting to find out their status which has caused great uncertainty.
What should you do now IR35 is postponed?
While the postponement of IR35 means you won’t need to press the “GO” button on 6 April this year, it is worth ensuring you continue to keep appraised of IR35, especially for those businesses which were on “catch up” to be ready for the changes this year. In order to be ready for next year we recommend:
- Keeping up to date of any proposed changes to IR35 over the coming year to ensure you can adapt accordingly;
- Continue assessing your contractor engagements to see if they come within the scope for IR35;
- Reviewing your payroll software, ensuring it can process “off payroll” employees; and
- Talking to your contractors to ensure they are aware of the delay, as it may impact their ongoing service provisions.
IR35 may not be happening this year but April 2021 will arrive quicker than we expect and the Government appears determined for it to still take place, this is simply a deferral. Use the time wisely to seek advice and get ahead of the game and avoid a last-minute panic in a year’s time.
Need IR35 advice?
If you would like to discuss IR35 or any other business challenge you’re concerned about and how it may impact you, our specialist team of business advisers is ready to help; contact Black and White Chartered Certified Accountants today, complete the ‘Got a Question’ form on the right hand side, or call us on 0800 140 4644.
