Despite huge opposition from many of the key players and workers in the contracting world, it seemed that the Government was still intent on pushing ahead with its plans to reform IR35 and extend the off-payroll working rules to the private sector.
But that was before coronavirus hit the UK. With it has come huge disruption for workers, businesses and the wider economy, and as a result, the proposed reforms to IR35 were postponed for 12 months – a move as unprecedented as the times we’re living in.
With businesses facing unprecedented challenges to stay afloat because of the COVID-19 pandemic, the Government has introduced a number of measures to alleviate the pressure on the economy and delaying the implementation of the reforms until 2021 was one of them.
This came as a welcome surprise to many contractors and those companies that work with them, as they now have another year to ensure they are compliant. But the industry is being warned to use this extra time wisely, as Joanne Harris, technical commercial manager at Nixon Williams, explains.
Don’t treat the next 12 months as an IR35 holiday
In other areas of industry, we’ve seen the Government grant effective ‘holidays’ in terms of things like business rates and mortgages, and IR35 is effectively in the same bracket.
The postponement means IR35 reforms in the private sector will now be implemented in April 2021, rather than the intended date of the 6th April 2020, and the Government has been clear that it still intends on bringing the changes in at that point. With an extra 12 months of preparation time, there should be no excuse for businesses not being ready when it comes around, or contractors not being sure on how the new rules apply.
The House of Lords published their report into the off-payroll reforms on 27th April 2020. It was highly critical of the reforms and urges the government to consider alternatives or at least delay the reforms further to allow the economy to recover from the COVID-19 pandemic.
This was followed by Conservative MP David Davis tabling an amendment to the Finance Act to delay the proposed reforms until 2023/24. This was debated in parliament on 19th May and despite the excellent points made by Mr Davis and others, Jesse Norman MP – Financial Secretary to the Treasury was unwavering in his commitment to push ahead with the reforms. Despite the campaign to delay or stop the reforms gaining cross party support, unfortunately, there are no signs as yet that the government will consider any further delays. Mr Norman confirming once again on Tuesday that there will be no further reviews of the proposed reforms.
As things stand, from 6th April 2021, all medium and large businesses will have to conform to the new rules, where the end hirer must assess the IR35 status of each assignment and produce a ‘Status Determination Statement’ (SDS).
If the end hirer does not pay the workers PSC directly, they will need to pass this SDS down the supply chain as it is the ‘fee-payer’ that is responsible for deducting the PAYE tax and National Insurance Contributions (NIC), where an assignment is assessed as inside IR35. If they fail to do this, the fee payer will be liable for the unpaid tax liability, not the contractor.
Contractors should also check the status of contracts
As the announced delay to the IR35 reforms came just 19 days before the reforms were due to take effect , lots of businesses had already implemented their strategies for working with contractors post the reforms.
If you were asked to work through an umbrella company as a result of the reforms, you will need to speak to your end hirer and recruitment agency to confirm if you are able to switch back to your limited company.
It is important to note that this is a deferral to the reforms, not a suspension of the IR35 legislation. The factors that determine IR35 status are unchanged. It remains your responsibility to determine the IR35 status of the assignment and ensure that you are paying the correct amount of tax.
If you received an inside IR35 Status Determination Statement prior to April 2020, it would be unwise to simply disregard this. Although it is not legally binding at this time, it clearly shows the end hirers opinion of the assignments IR35 status. If you disagree with a status determination you should get your contract and working conditions reviewed by an expert so you can account for the income and your tax liability correctly.
The financial impact and how to address this
Without question, the reforms to off-payroll working could have a negative impact on your finances. Therefore, contractors need to be clear on how much their income could be impacted and what rates they are willing to accept.
Contractors should review their daily and hourly rates to manage any potential shortfall, but it’s also important to consider that rate increases may not be welcomed by clients, who face their own costs due to the off-payroll reforms
As of April 2021, for assignments assessed as inside IR35, the Fee Payer will be responsible for paying Employer’s National Insurance at 13.8 per cent (plus an apprenticeship levy cost of 0.5 per cent if their total wage cost is above £3 million). This cost should be absorbed by the end hirer however, be aware that they may wish to renegotiate your rate to accommodate this extra cost. You need to be prepared for this and speak to your accountant to work out what rate you would need inside IR35 as a minimum to meet your costs.
You may wish to consider placing your limited company on a non-trading package with your accountant and working through an umbrella company for any inside IR35 assignments. Many accountants have relationships with umbrella companies or at the very least can recommend a reputable one to you. Nixon Williams recommends Parasol as the market leader and crucially, as they are founding members of FCSA, we can be confident of their compliance.
At a time where finances are tight it is essential that you are not tempted by non-compliant umbrella companies that are offering a higher take home pay. Whilst these tax avoidance schemes may reduce your tax bill initially, HMRC will catch up with them and you will be left with a large unpaid tax liability, plus interest and penalties to pay.
Seek expert advice to help you make an informed decision
Contractors should seize this extra time before April 2021 to ensure they’re making an informed decision on their futures.
Speaking to a qualified accountant will help contractors to map out all of their post-IR35 reform options and determine the best method of contracting. They’ll calculate what take home pay would be if you worked on contracts deemed outside of IR35 through a limited company versus working as a PAYE employee or through an umbrella company.
Get your contract and working conditions assessed by an expert, if there are adjustments that can be made to the contract or working conditions to strengthen an outside IR35 position then work with your client to achieve this. This will put you in a strong position come April 2021.
Knowledge is power, and keeping up to date with the developments in IR35 and the off-payroll reforms is key for contractors to make sure they know what the best option for them is and are not left struggling when the off-payroll working reforms are implemented next year.