IR35 catch up // How should you be preparing for 2021?
Let's start with an IR35 reminder to bring you up-to-speed.
In the late '90s, the UK Government identified a trend where, to avoid paying tax, some individuals had been working 'like' permanent employees while contracted through a Personal Services Company (PSC). This meant employers didn't have to pay employment taxes or related costs and PSCs could tax-efficiently withdraw funds.
To combat this, in the year 2000, new tax legislation called IR35 was released. IR35 ignored the PSC and instead, would focus on the working relationship between the two parties to determine tax status. As such the PSC became responsible for their tax status under IR35 rule, taking on all financial risks associated with incorrect tax decisions and underpayments.
In 2017 this all changed, as IR35 was reintroduced to the public sector under the title, 'Off-Payroll Working Rules. Now, end clients would take-on responsibility for tax status determination (along with the associated risks). Then, during the 2018 Budget, Chancellor Philip Hammond announced that IR35 taxation frameworks would be extended to medium and large-sized businesses in the private sector: beginning April 2020.
In the months that followed companies and contractors alike, attempted to stop or at least delay IR35 private sector rollout. The Government did conduct a review into IR35, but even then, its focus was on the successful implementation of change – not whether IR35 should occur or not...
As a result of the Coronavirus pandemic, on March 18th 2020 (less than a month before the original IR35 release date), Steve Barclay the Chief Secretary to the Treasury declared that the tax reform would be postponed 12 months – to April 6th 2021.
"This is a deferral, 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 the same tax as those employed directly"
- Steve Barclay, House of Commons statement
In the most part, this announcement was well received, as it gave all parties more time to iron-out their IR35 intentions and processes. While some of our clients did revert to their freelancers determining IR35 status again, as-to maximise on this workforces' capabilities - many companies decided to continue with this new legislation, given the effort taken to reach inside/outside status decisions.
Since then, contractors have been dramatically impacted by the effects of Coronavirus. A survey of 1000+ contractors by Contractor Calculator found that:
50% of contractors have suffered financial hardship as a result of COVID-19
The pandemic has created new stressors for 70% of contractors
33% of contractors noted that they haven't worked at all following lockdown
48% have severe concerns about finding new work (38% describe themselves as 'somewhat concerned')
Only 6% believe the support available to the self-employed has been adequate
68% are less trustful of Government following its handling of COVID-19
88% of contractors had financial savings in preparation for the worst – with 53% having to use cash reserves to support them during lockdown
Relating to IR35, the survey found that 24% are considering a move to permanent employment, compared to 37% who will continue contracting. For those looking at a move to perm, 88% cited IR35 changes as a key factor – while a further 63% highlighted poor Government support for the self-employed.
On July 8th the now Chancellor, Rishi Sunak, held an economic update referred to as the Summer Statement. Although not directly referenced in this announcement, an accompanying policy paper titled 'A Plan for Jobs 2020' stated that the 2021 delay to IR35 "means that businesses and individuals do not need to implement and adjust to the reform while dealing with the economic impact of COVID-19".
Now, this would be fine if we believed the IR35 release would be further postponed, given the long-term effect of the Coronavirus pandemic. However, calls for the rollout to be delayed to 2023 have been unsuccessful. Amendments, including the new clause 1 and schedule 1, passed through Parliament without opposition during the committee stages of the Financial Bill, essentially green-lighting plans for IR35 reform next April (2021).
As such, advising businesses and contractors not to adjust now in preparation for April 2021, we feel, is poor advice from the Government. At the time of writing, less than eight months are remaining – making it vital for businesses and contractors to be ready, with full consideration given to optimising business processes for IR35 compliance.
For private sector companies due to be affected by IR35, key considerations before the reform is implemented, as described by our partners Qdos Contractor, include:
How many contingent workers you have engaged and who are they? What are their roles?
How you're going to establish the facts of each engagement on a case-by-case basis and the processes you are going to follow to comply with the new rules
What advice, resources, and tools you can use to make informed decisions about your contingent workforce
As a hiring organisation your obligation will be to provide a 'Status Determination Statement', to both the contractor and the next party in the chain (often a recruitment agency), stating whether you believe IR35 applies or not. Vitally, this statement must include the reasoning behind an inside or outside determination that clearly demonstrates the use of reasonable care.
Until this statement is provided, you're classed as the fee-payer; taking on IR35 liability along with responsibilities to deduct appropriate tax/NICs from the contractor, before paying this to HMRC.
Companies need to ensure they can identify PSCs in their supply chain, put processes in place for determination and status challenges, have contractual provisions ready with agencies and PSCs – and have procedures in for payroll deductions, where appropriate.
For contractors, although IR35 status decisions are the clients to make, there may be ways you can influence that determination. If you've not been contacted by your end client or recruitment agency, start the conversation, help them confirm your arrangements. Prioritise the capacity to provide a substitute in a contract, ensure you can demonstrate you're not under the direct control and that there's no mutual obligation for future paid work with the client. Strengthen your position, gain advice from specialists and ensure you can demonstrate you run a legitimate business.
At Caspian One, we have been at the heart of IR35 private sector reform since the original budget announcement in 2018. We've kept in close communication with our clients and freelancer community, in both the financial and broadcast industries. We are uniquely positioned, central between companies and contractors – which has empowered us to consult and advise on IR35.
For more information on how you or your company should be preparing for the release of IR35 in April, arrange a call or video chat meeting with one of our consultants – email email@example.com // +44 (0) 1202 979 700