Yesterday evening, the government postponed the implementation of the IR35 reform as part of wider measures to bolster the UK economy against the COVID-19 pandemic. Chief Secretary to the Treasury Steve Barclay stressed the move was to delay the reform, not cancel it.
"This is a deferral in response to the ongoing spread of Covid-19 to help businesses and individuals,” he said. "This is a deferral, not a cancellation and the Government remains committed to reintroducing this policy to ensure people working like employees, but through their own limited company, pay broadly the same tax as those employed directly."
Due to be rolled out to the private sector on April 6th, this last-minute about-turn has left contractors, recruiters, and end clients reeling. The latest iteration of the off-payroll rules has been in effect in the public sector since 2017, and despite the application to the private sector being roundly regarded as ill-advised, it was cemented to go ahead in the Budget 2020 document released on March 11th.
Those that have and haven’t prepared may be feeling somewhat differently about this update – so where do we go from here as a contracting community? The unanimous opinion is to keep preparing.
Take this year to set up a proper IR35 process, advises Larsen Howie’s Matt Tyler
Matt Tyler, IR35 Consultancy Manager at Larsen Howie, agrees that pausing the legislation is the right thing to do at this time.
“The announcement from HMRC will no doubt be well received by the contracting community and is ultimately the correct move from HMRC amidst the far more pressing concern of COVID-19,” he says. “This will reduce pressure on contractors who are no doubt concerned about what the outbreak will mean for their projects which can only be a good thing.”
“What this means for contractors in general however is that after the 6th April your liability is no longer going to shift to the end client,” Tyler continues. “If you have a contract that is going to extend past 6th April that you were leaving to your end client to deal with, I would give some serious thought as to its standing from an IR35 perspective as there is now an extra year of liability you will need to concern yourself with.”
“For agencies/end clients – do not rest on your laurels. We’ve all had a taste of what the changes will bring, so take this year as time to set up a proper process to allow contractors to be assessed fairly on their IR35 status with plenty of time on the run-up to April 2021. The very last thing you want to do is to sit back and end up putting in place last-minute measures this time next year!”
Andy Vessey urges clients and recruiters to use time wisely in IR35 delay
Andy Vessey, Head of Tax at Larsen Howie – and previously an HMRC tax investigator for a number of years - also warns that HMRC may clamp down on compliance over the next year regardless.
“Given that end clients and recruiters have now another 12 months to prepare, I would expect the 12-month soft landing assurance previously promised for this year to be withdrawn when the reform is implemented in April 2021, particularly as there will be a need to recoup as much tax revenue as possible to repair the huge dent in the Treasury’s coffers caused by COVID-19,” Vessey says. “In other words, the market has twelve months to get this right. After that, there will be strict enforcement.”
“We may well also see HMRC IR35 compliance activity ramped up in 2020/21 because of the fact that anticipated PAYE & NIC receipts arising out of the operation of the off-payroll rules will need to be recovered elsewhere,” he continues. “Contractors should, therefore, ensure they work with end-clients and recruiters to change their working practices, have tax fee protection or, even better, tax loss insurance in place for such an eventuality.”
“End clients and recruiters should certainly not take their foot off the pedal but maintain their momentum to be well prepared for the inevitable on 6th April 2021, working to embed new tools and working practices across the entire supply chain.”
“Additionally, it will be interesting to see if those larger firms that have somewhat arbitrarily imposed blanket bans on PSCs, use the extra time and pressures on their business to take a more informed and balanced approach that uses the various assessment tools and insurance solutions out there to protect their risk without unnecessarily increasing their costs or ability to deliver projects. Use this time wisely and productively.”
James Poyser hopes for Lords review to have more sway thanks to IR35 delay
James Poyser, CEO of inniAccounts and founder of IR35 spotlighting site offpayroll.org.uk, welcomes the pause.
“The Lords made it pretty clear in yesterday's committee hearing that the Treasury's IR35 position was increasingly untenable, with the rising backdrop of Coronavirus,” he says. “I do welcome this pause - it means that contractors can now switch gears and put all of their energy into the wider challenges we'll all going to face in the coming months. Whilst nobody can rest easy right now (permie or contractor), this announcement will make many contractors feel much better about the year ahead.”
Poyser also hopes that thanks to the wider fiscal measures against coronavirus now in place, the contracting community will continue to thrive, despite the less-than-desirable economic situation.
“We're going to have to keep a watching brief on the market in the coming months. Whilst the wider economy is due to enter a turbulent period, it's clear by the scale of the £330bn financial measures made available by the Treasury today that the government wishes to keep the economic engine running as much as they can. We hope these two factors combined have an impact on the contracting market.”
“This will also give time for the Lords review to be published, and we hope that the Treasury and HMRC listen to their recommendations before attempting to re-table this legislation for April 2021,” he finishes.
Keep your contractors (and IR35) in mind, says Nicola Hayman
Nicola Hayman, Legal Manager for Kingsbridge Contractor Insurance, is also happy to hear about the delay in the reform rollout. However, she insists that business leaders shouldn’t forget about their contractor workforce, or the IR35 reform, amongst the more pressing issues they’re currently facing.
“There is no doubt that employers and recruiters across the UK will be heaving a huge sigh of relief that changes to off-payroll working rules now won’t go ahead in April as planned,” Hayman says. “Aside from the fact that the global Coronavirus pandemic is putting unprecedented and immediate pressure on many British businesses, anecdotal evidence suggests that many were already ill-prepared to manage planned IR35 reforms.”
“There is a significant opportunity for recruiters to use this extra time to properly educate their end-clients and work with them to develop a clear path to a solution that maximises their ability to retain their contingent workforce outside IR35 and minimise their costs, rather than adopting the panic measures that some were being forced into,” she continues. “Indeed, our expectation is that winning recruiters will be those that continue to implement and embed their new IR35 compliant processes with clients as if the reform was coming in now. This will give them a real long-term competitive advantage with end-clients versus those who don’t take action now and leave their clients scrambling in twelve months’ time.”
“Even when using HMRC’s own calculations, the vast majority of PSC contractors are genuinely self-employed – but processes must be put in place to ensure this talent pool can be used in a compliant way, backed by insurance for extra peace of mind. Now, more than ever, businesses will need to rely on flexible workforces to adapt to demand in an uncertain market – and April 2021 will be here before we know it.”
Communication is key in trying times - whether it's COVID-19 or IR35
We urge all points of the supply chain to stay vigilant in their preparations. For those end clients that have previously blanket-determined their contractor workforce as a risk-avoidance measure, we ask you to use this time to reconsider your approach to the legislative change. IR35 has been postponed, not cancelled; any time and resource invested in getting ready for the reform will not be wasted and will stand you in good stead versus competitors who are burying their heads in the sand.
Use this time to refine your processes and ensure that you’re assessing each and every contractor fairly. While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, there are other, more tailored options available that are just as valid. There’s an argument to opt for a ‘manual’ or ‘hybrid’ status review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed without a specialist to interpret the answers. It may take longer to receive your determination, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
The most important thing to remember, no matter what happens with the legislation or COVID-19, is that collaboration is key. Maintain good communication during the whole process and encourage transparency throughout the supply chain to keep business contacts on-side. Now’s the time to pull together as a workforce.
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer representation from Andy Vessey should it go to tribunal, as well as training and consultation for businesses that wish to continue working with their invaluable contractor workforce.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news, and contractor guides.