IR35 reforms to be postponed due to coronavirus
18 March 2020
The government has announced that the planned reforms to IR35 will now take effect on 6 April 2021.
This is one of the measures the government has brought forward to help businesses and individuals in the light of the coronavirus pandemic. The proposed IR35 reforms will now be deferred for one year, taking effect on 6 April 2021 instead of 6 April 2020 as previously planned.
The government has previously resisted all pressure to delay or amend the proposals. It is clear, however, that this is a deferral of the reforms rather than an abandonment, and it remains committed to introducing them. The postponement will come as an enormous relief to businesses who were struggling to get ready for this significant change to employment tax at the same time as dealing with the issues thrown up by the fast-changing coronavirus situation.
What IR35 changes were planned?
IR35 applies where a contractor provides services to an end-user via a personal services company (PSC) or other intermediary but, if the contractor was engaged directly, they would be an employee for tax purposes. Currently, the contractor is supposed to operate PAYE and deduct NICs if IR35 applies.
For any payments made on or after 6 April 2020, all of that was set to change so that the end user became responsible for assessing if IR35 applies, and the fee payer (i.e. the entity which is contracting with the PSC who may or may not be the same as the end-user) became responsible for operating PAYE and NICs and paying employer NICs and the apprenticeship levy where it did.
What should businesses and contractors do now?
End-users need to decide what to do in the light of this last-minute announcement that the changes will be deferred to 6 April 2021. Contractors providing labour through PSCs can simply be paid as before, with no need to make any assessment of the contractor’s status for tax purposes or to operate PAYE or NICs.
End-users are no longer obligated to:
- undertake a determination (whether using CEST (Check Employment Status for Tax), IR35 Shield, or any other tool); or
- issue a Status Determination Statement.
However, end-users may see a benefit in doing a quick CEST check (even though CEST may well change again before April 2021) in order to identify whether the contractor may fall inside IR35 in future. In this case, the end-user may want to consider in advance whether any practice changes might make a difference, or whether it would be preferable to contract with the individual as an employee.
Some end-users have already taken steps to migrate contractors onto different arrangements or have already instructed agencies to supply contractors on a different basis. Those end-users will need to think about whether to backtrack, or to stick with the new arrangements on the basis that the reforms are still set to come into force eventually. In many cases, it may be too late to backtrack if the arrangements with contractors have already terminated.
Contractors who are continuing to provide labour through their PSCs will need to complete their tax returns for the coming year and self-assess their own IR35 status (as is already the case). If they have already received a status determination statement from their end-user under the planned reforms, they will need to consider if and how that impacts their self-assessment exercise.
Despite the postponement of the changes we recommend it will be good practice to continue to include new IR35 wording that has been inserted into template PSC contractor agreements, agency/umbrella agreements, supply of staff agreements, and managed service agreements. Do check, however, whether that wording says anything like, “anticipated to come into force on 6 April 2020”, in which case that should be altered to 6 April 2021.
In terms of the standard business terms and conditions that businesses are using:
- Businesses who provide managed services (rather than staff) should welcome this opportunity for an additional year in which to educate their customers about the fact that IR35 does not apply to them at all.
- All businesses, whether they supply staff or managed services, should ensure they get their terms and conditions up to date to anticipate IR35, no matter when it comes in, so that any contracts they enter into during the coming year will already be under IR35 compliant terms. Note, however, that different IR35 wording will be needed depending on whether they are supplying staff or managed services.
- Businesses which until now have run a number of models including secondment of staff, supply of staff to clients, and/or managed services while using very similar or even identical business terms and conditions, should use this opportunity to delineate their business models, create separate terms for each model, and train those who use them on when to use which terms. This is a very real issue that we have uncovered over the past few months and we’re planning to run a workshop on it during the coming year.
Overall, the decision the postpone the IR35 changes is welcome news in unsettling times for those businesses that use PSC contractors - giving business greater freedom to use such contractors for the coming year, crucially without the extra employer NICs and potentially apprenticeship levy costs or the administrative burden of doing so.