The government has postponed controversial tax reforms to off-payroll working rules known as IR35 for the private sector until 2021, to help ease the strain COVID-19 is putting on businesses and individuals.
The decision was announced yesterday evening (17 March) in the House of Commons, along with an emergency £330bn financial package to bolster the UK economy that includes a business rates holiday, as well loans for struggling firms.
Speaking in Parliament on Tuesday evening, Chief Secretary to the Treasury Steve Barclay said: ‘The government is postponing the reforms to the off-payroll working rules, IR35, from 6 April 2020 to 6 April 2021…in response to the ongoing spread of COVID-19 to help businesses and individuals’.
Here, Which? explains what you need to know about the move and what to prepare for in 12 months’ time.
- You can keep up to date on our latest advice on the coronavirus outbreak over on our coronavirus advice hub.
IR35 delayed not cancelled
Crucially, the IR35 reforms have been pushed back and not cancelled – despite calls for the changes to be scrapped.
Mr Barclay said: ‘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 broadly the same tax as those employed directly.’
The off-payroll working rules, or IR35, were introduced in 2000 to ensure that someone working as an employee but paid via a Personal Services Company (PSC) would be subject to similar levels of tax as other employees.
You fall ‘inside’ IR35 rules for tax purposes if you would be considered an employee of the company if the PSC wasn’t in place.
In the past, it was up to contractors to determine if they fell inside IR35. But in 2017 the responsibility was shifted to public sector organisations hiring the workers – and the private sector is up next.
It has been estimated that non-compliance is set to cost the Exchequer more than £1.3bn a year by 2023-24 if it’s not addressed.
What IR35 rules will apply in April 2021?
The Treasury recently undertook a review of off-payroll working rules after criticism over the adverse effect the changes could have on both businesses and freelancers.
The findings of the review were released in March. It found that the reform will be a ‘major change’, but said it will still go ahead. However, a number of alterations were made to help organisations and contractors prepare, including:
- There will be a ‘light-touch approach’ – HMRC has been told not to place penalties on anyone with inaccuracies relating to off-payroll working rules during the first year of the roll-out. However, anyone who deliberately fails to comply can still be charged.
- Clients will be legally obligated to supply information – The government will place a legal obligation on clients that means they must respond to requests of information about their size from agencies or workers – this addresses the fact that IR35 is due to affect mainly medium and large organisations, which are categorised as having at least 50 employees.
The Treasury also said in March that information won’t be used for new investigations into PSCs for tax years before 6 April 2020, unless there’s reason to suspect fraud or criminal behaviour.
The Treasury confirmed to Which? this will shift to 6 April 2021 because of the delay.
The rules were also tweaked to only apply for services carried out after 6 April 2020. Which? also clarified with the Treasury that this date will move to 6 April 2021.
Previously, the changes were going to take in any work or payments received on or after 6 April, so this gives workers and businesses alike more time to prepare.
What hasn’t changed is that the burden of deciding whether or not a worker is IR35-compliant will shift to the organisation contracting the work, rather than the worker themselves.
Companies will need to tighten up their hiring practices, and contractors may increasingly see themselves classified as within IR35.
Who could be affected by the IR35 rollout from 2021?
Many contractors offer work to clients by setting up their own PSC. The client then hires the PSC, which in turn pays the contractor.
However, HMRC believes thousands of people working under these arrangements should actually be paying the same tax as employees.
There are three main groups of workers likely to be affected by these rules:
- Up to 170,000 individuals supplying services through an intermediary, such as a PSC, who would otherwise be fully employed.
- Up to 60,000 medium and large organisations (with 50 or more employees) working in the private sector, which hire individual workers via PSCs.
- Around 20,000 recruitment agencies and other intermediaries which supply staff through PSCs.
If you’re not sure whether or not you, or someone you employ, would fall inside of IR35, there are three main ‘tests’ you can use to check:
- Do you have control over how the work is completed? This refers to being able to decide your working hours or the location of where the work is carried out. If the choice isn’t down to you, it’s likely you will be inside of IR35.
- Is there a mutuality of obligations? If the company you’re working for is obliged to give you more work once you’ve finished a task, you may be inside of IR35.
- Do you personally have to complete the work you do? To be outside of IR35, there should be a substitution clause in your contract – and you should be in control of the substitute.
If the IR35 rules apply, companies will have to deduct the relevant employment taxes and National Insurance Contributions from the person’s pay.
- Find out more: use our income tax calculator to work out your bill
What IR35 means for the self-employed
The government says that genuine freelancers and self-employed workers won’t be affected.
However, a consultation into IR35 that ran between 5 March and 28 May 2019 found 90% of the 170,000 affected contractors could stand to lose up to 20% of their income as a result of the changes.
That’s because freelancers, as self-employed workers, would usually only be taxed on their profits, not their full earnings.
Some people employed through a PSC pay themselves via a mixture of income and dividends, which gives them the advantage of using the £2,000 dividend allowance and the lower dividend tax rate.
Self-employed workers also pay different rates of National Insurance, and employers don’t pay a contribution for self-employed contractors.
If considered to be inside IR35, both self-employed workers and their employers will have to pay more tax.
Other concerns included the unknown impacts of Brexit – and now coronavirus – on UK business and that many businesses would need more time to alter their payroll and tax systems.
- Find out more: the taxes you pay as a small business