With all political avenues of challenge to the UK's off-payroll tax reform now exhausted, Fieldfisher employment and tax specialists Ranjit Dhindsa and Matthew Sharp summarise the latest developments in the progress of the legislation and outline steps businesses should take now to prepare ahead of April 2021.
In March 2020, the UK government announced a 12-month delay to its planned IR35 reform in the private sector, which had been due to come into force in April.
The postponement, which was widely welcomed by businesses and contractors, was intended to give companies time to focus on dealing with the effects of the Covid-19 pandemic.
Announcing the deferral on 17 March, Chief Secretary to the Treasury, Steve Barclay, stated:
"This is a deferral and 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 amount of tax as those employed directly.”
True to its word, since March the government has been systematically putting in place the necessary preparations for implementing IR35 in April 2021.
The Finance Bill 2019-21 (which introduces the IR35 reform) had its first reading in the House of Commons on 17 March. This was followed in April by the publication of the House of Lords Finance Bill Sub-Committee's findings on the draft legislation.
The report was highly critical of the proposed reform, repeatedly describing the IR35 framework as "flawed", and as dictating rules that have "never worked satisfactorily, throughout the whole of their 20-year history"
Commenting on the Report, Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said:
"The Committee welcomed the Government's decision to defer these off-payroll working rules in the wake of the Covid-19 pandemic. However, our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked […]."
Lord Forsyth added that "wholesale reform of IR35 is required" and queried whether businesses and contractors recovering from the Covid-19 crisis will be any better prepared to deal with the "extra burden" of the reforms by next April.
Yet despite significant pressure from the House of Lords, the government decided to press ahead with the draft legislation. In an official response to the House of Lords Report, published on 1 July 2020, HMRC rejected calls for delay and the criticisms raised, stating simply that HMRC is "enhancing its education and support to businesses and individuals ahead of the implementation of the reform in April 2021."
End of the road?
At the end of June, in a last ditch attempt to postpone the reform, Conservative MP David Davis and Liberal Democrat MP Ed Davey proposed an amendment to further delay IR35 implementation until 2023/24 – a move that was rejected by a Commons vote of 317 to 254.
Following a second reading of the Finance Bill on 17 July, the legislation remains unchanged and is expected to come into force, complete with the April 2021 implementation date for IR35, in the coming weeks.
Time to prepare?
Despite the 12-month deferral of IR35 reform coming just weeks before it was originally due to be implemented, surveys have found that a significant proportion of businesses have still not prepared for the new rules.
One survey published in March found that 37% of contractors surveyed had not been assessed for IR35 status, and this figure is unlikely to have changed much since the Covid-19 lockdown was imposed.
Feedback from the business community similarly suggests that a substantial number of companies that use contractors are yet to make proper preparations for the forthcoming reform.
Those that have taken steps to assess their exposure to the new IR35 rules have been surprised at how complex and time consuming the compliance process is.
For businesses with large off-payroll workforces, understanding the new rules, performing status assessments, and reviewing and implementing contracts and relevant documents can easily take six months or more, while smaller and medium-sized companies have found they lack the bandwidth to properly deal with IR35 requirements.
With IR35 reform now all but certain to be introduced in April 2021, businesses must act promptly to prepare if they have not already done so.
Analyse current working practices
Businesses need to identify who they are currently contracting with, and on what basis. A risk-based approach should be adopted and amendments made to working relationships where necessary.
Businesses should review their payroll systems, booking systems and other processes to ensure they have the capacity to apply PAYE to contractor pay, where necessary.
Approach HMRC's CEST tool with caution
HMRC's 'Check employment status for tax' (CEST) tool has been the subject of widespread criticism and should be approached with caution.
Open discussions with contractors
The preparation stage is a good time for clients and their workers to engage in open conversations about their IR35 status. This can involve looking at the questions asked by HMRC's CEST tool and using them as a starting point for these discussions.
Don't forget about employment law
Employment law is dynamic and constantly changing, based on how courts determine the employment status of particular individuals.
This makes this area especially complex, and Fieldfisher's employment law experts can help businesses avoid falling into traps regarding the determination of workers' status.
Consider your post-Covid position
Organisations are having to ask hard questions about their organisational structure and access to certain skills and talent as the UK emerges from the Covid-19 lockdown.
Many will welcome the ability to engage consultants in a flexible and agile way, so it is important they can do this compliantly, without incurring negative scrutiny from HMRC.
The economic pressures of Covid-19 remain all-consuming for many companies, but ignoring IR35 promises to store up further potentially catastrophic problems, which can be alleviated by taking the following steps now to ensure businesses engage PSCs in the right way.
Fieldfisher can help businesses prepare from both an employment and tax perspective.
For more information on IR35 and how to prepare, please get in touch and ask about our complete IR35 Audit service, or visit Fieldfisher's dedicated IR35 webpage.
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