There was an audible sigh of relief from businesses in March 2020 when the Government announced a last minute postponement to the implementation of new IR35 regulations. With the continuing challenges of COVID-19 in the workplace, the 12 month postponement provided to businesses has been put to the back of many people’s minds. Whilst it is a tad early to be donning an Ebenezer Scrooge outfit, this article is a sharp reminder to businesses that IR35 has not gone away and our attention will shortly be redirected to the new implementation date of 6 April 2021.
The good news is that a number of businesses had already done the heavy lifting prior to the original proposed implementation in April 2020. This will likely save a lot of management time heading into the 2021 review. The bad news is that the final legislation has been slightly tweaked, widening the scope of IR35, and businesses may need to revisit their initial analysis to ensure that it still satisfies the final legislation provided for in the Finance Act 2020.
Below we provide a reminder of the regulations and revisit the most asked questions we received in the lead up to the planned implementation of IR35 on 6 April 2021.
- What is IR35?
- IR35, so named for being the 35th press release by HMRC, is an attempt by HMRC to tackle what it believes is ‘disguised employment’. In summary, the focus of IR35 is to identify individuals engaged by a business (the end user) through an intermediary or personal service company rather than being employed directly by the end user. As a result of this type of setup, the individual gains a tax benefit, despite, in many cases doing similar work to employees of the end user and being under the control of the end user.
- So what is changing in general?
- Currently it is for the individual/agency/personal service company to identify whether their assignment with an end user will classify them as an employee (and thus attract a higher tax rate). Not surprisingly, very few individuals identified as employees and therefore remained at the lower tax rate. Should it be found that such a review was incorrect, the personal service/company/individual were responsible for repaying the tax/fines levied by HMRC.
From 6 April 2021 the responsibility for identifying the employment status of the individual will transfer to the end user or employment agency. If the end user/agency believes that the individual may classify as an employee, then it will be for them to make the correct deductions for PAYE from the fee agreed with the individual/personal service company. Should the end user fail to correctly identify the employment status of individuals then they will become responsible to HMRC for tax demands and any fines levied.
- So we know exactly what the rules are and what to do by 6 April 2021?
- Whilst there was a lot of uncertainty in the run up to the 2020 implementation, the new 2021 date has given the Government time to finalise the rules on IR35. On 22 July 2020, the Finance Act 2020 was given Royal Assent. Whilst the final Act contained substantially the same wording as the draft legislation we were provided with in early 2020, there are some minor, but important, changes which widens the scope of IR35. New guidance has been released by the Government which can be found here.
- What are the key changes from the initial draft legislation?
The Finance Act 2020 introduces a few changes from the draft legislation from which we had sight of in late 2019. Firstly, the end user must now be either a UK resident or have a UK permanent establishment for the rules to apply. A new deadline of 45 days has also been introduced for end users to confirm, within 45 days of any request, as to whether they are categorised as a small business and therefore exempt. This also ties in with amended wording for the dispute process where it suggests that a dispute should be raised prior to a final payment in the chain being made.
Finally, lawyers and accountants were alarmed to note the updated definition of “company intermediary” had been amended slightly to include any company from which the contractor has the right to receive a payment which can reasonably be taken to be a reward for the contractor’s services to the end user. Clarity has been sought around this updated wording which we believe was intended to catch “gross pay intermediaries”. Many of these gross pay intermediaries are umbrella companies or divisions of umbrella companies and concerns have been raised that the new Act would deem those companies to be subject to IR35. It is considered that the implication of the wording of the Act is unintended and, whilst HMRC have commented upon the same in their latest guidance (above) we are still awaiting official confirmation on the same.
As the changes become clearer, we will be hosting bitesize events throughout 2020 and into early 2021 to help prepare businesses for the changes ahead. The first in this series is on 12 November from 09:30 until 10:30, where Steve Conlay and Iain Garfield will discuss the implications of IR35 on your organisation. To book your free place, click here.
For more information about IR35 and how it could affect you or your business, or any other employment law matters, contact firstname.lastname@example.org
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.