When HM Revenue and Customs published their 35th press release of 1999, commonly known as ‘IR35’, they anticipated that changes to the tax system would increase tax revenue by £300 million a year. Over the next 10 years, the enforcement of IR35 resulted in roughly £1.5 million of extra tax per year, only around 0.5% of HMRC’s estimate.
So what went wrong?
The idea behind IR35 was simple – if a worker provided services to a client, but had set up his own ‘personal service company’ through which to operate in order to reduce his income tax and national insurance liabilities, that company would be ignored for the purposes of tax calculations and he would be taxed as though he was the client’s employee.
In other words, if the client and the worker would have been employer and employee in the absence of the company, then HMRC would treat them as employer and employee.
The problem was that it was left to the worker to decide whether he was, or was not, an employee of the client. And it was invariably in the worker’s (and the client’s) favour to decide that he was self-employed in order to minimise each party’s tax liability. As a result, IR35 actually made very little difference in practice.
The law first changed in April 2017 – if the client was in the public sector, then the decision as to whether the worker was or was not an employee would be made by the client. The Government’s view, probably correctly, was that public sector clients’ compliance regimes would mean they were far more likely to err on the side of caution, and decide that a worker was an employee, than if the decision was left to the worker. As a result, many workers in the public sector found that they were being taxed as though they were employees of their public sector clients.
And it was decided that those same changes would be rolled out to parts of the private sector in April 2020, namely to those businesses that are classed as ‘medium or large-sized’ organisations by satisfying two or more of the following conditions:
- an annual turnover of more than £10.2 million,
- a balance sheet total (ie. total assets before deducting liabilities) of more than £5.1 million, or
- more than 50 employees.
Hidden away in section 2.26 of this year’s Budget Report, published on 12th March, it said:
“Review of changes to the off-payroll working rules (commonly known as IR35) - at Budget 2018, the Government announced that it would reform the off-payroll working rules in the private and third sectors from April 2020 … The Government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 and implemented on 6th April 2020”
But then, just five days later, the Chief Secretary to the Treasury stood up in the House of Commons and announced that the changes will be delayed and would not come into force until April 2021. He said:
“This is a deferral in response to the ongoing spread of Covid-19, to help businesses and individuals. This is a deferral, not a cancellation, and the Government remains committed to reintroducing this policy”
That is obviously welcome news for contractors, and those industries who rely on them, but it is very much a temporary reprieve – we are likely to be back here again in 12 months’ time.
But here are questions that I want to pose in this article:
- To the contractors and workers – if your client has already completed a status determination test, and decided that you are an employee, are you happy to take advantage of the delay and keep working as self-employed at your own risk and liability for another year, but in the knowledge that you’re breaching the current IR35 rules by not paying the appropriate amounts of income tax and national insurance?
- To clients - if you have already completed a status determination test, and decided that your workers are employees, are you happy to keep paying them on a self-employed basis for another year, knowing that you should already be making PAYE deductions and employers’ national insurance contributions?
Or, knowing what changes are coming, are you going to apply April 2021’s rules now?
Our summary of the Self Employed Income Support Scheme may help you answer these questions.
Yes, there are likely to be far more important matters for you and your business to deal with during the coronavirus crisis, but all parties would be well-advised to ensure the issue doesn’t disappear off the radar completely.
Bearing in mind the current economic climate, April 2021 may seem a long way in the distance, but BPE’s Commercial and Employment Teams remain available to support you with any questions regarding to the application of IR35 to your business, both currently and post-April 2021.
This article follows on from Iain's previous article which explains exactly what IR35 is and what will change.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.