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Government review of IR35 – what do the changes mean?

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United Kingdom

Responding to the publication of the UK government's review of the changes to IR35 legislation due to come into force in April, Fieldfisher tax specialist Matthew Sharp analyses the report's conclusions. On 7 January 2020, in response to pressure from contractors and businesses, the government launched a formal review of forthcoming changes to off-payroll working in the private sector (colloquially referred to as IR35), which come into effect on 6 April 2020.
 
The government has now published the outcome of that review, which essentially contains no meaningful changes to the new rules.
 
The single biggest demand from contractors and businesses alike was to further delay the implementation of the off-payroll working rules, which stand to affect private sector users of contractors' services, having been rolled out to the public sector in 2017.
 
Political uncertainty and public pressure has resulted in significant ambiguity over the changes to IR35 and their implementation in recent months, with businesses not knowing whether to prepare or not.
 
Responding to these calls in the review, the government has stated:
 
"The Government is grateful for the contributions to the review. While there remains some opposition to this change, the Government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules. The reform will therefore go ahead on 6 April 2020."
 
The limited changes arising from the review can be summarised as follows:
 
  • Customers will not have to pay penalties for errors in the first year following the rule change, "except in cases of deliberate non-compliance". 
 
  • HMRC has confirmed, again, that it will not use information gleaned from the off-payroll working rules to bring historic challenges against contractors, "unless there is reason to suspect fraud or criminal behaviour".
 
Businesses and contractors need to be aware that this promise would not be recognised as a defence to any demand by HMRC in the Tax Tribunals; it is therefore of little or no value.
 
The only practical way to enforce this promise would be through separate judicial review proceedings on the basis of a "legitimate expectation".
 
Judicial review proceedings are complex and HMRC's success rate is very high, meaning this will not be an attractive option for taxpayers.
 
  • The government will place a legal obligation on businesses to respond to a request for information about their size from the agency or contractor.
 
In addition, the government has already announced that the off-payroll working rules will only apply to services carried out from 6 April 2020 onwards.
 
Further, to assist contractors and businesses, HMRC has also published additional IR35 guidance.
 
It has updated its Employment Status Manual, which sets out detailed information on the off-payroll working rules.
 
It has also published a number of 'communication resources' to assist businesses in discussing the forthcoming changes with contractors.
 
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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