IR35 Delayed until April 2021: What does this mean for companies?
Just one week ago Rishi Sunak delivered his first budget. It was something of an emergency budget with a significant number of provisions related to COVID-19. Hidden in the supporting Budget documents there was a single paragraph confirming that the private section IR35 reforms would be going ahead as planned.
Fast forward a week and everything has changed! Suddenly last night, and unexpectedly for almost everyone in the industry, the IR35 changes were postponed for an entire year (watch the full announcement here). It really was a huge surprise for everyone at this 11th hour.
Of course, it is very welcome news for the whole contracting industry. Increased tax burdens and increased administration would not have been welcome in these challenging, uncertain times. It doesn’t, of course, mean that IR35 has gone away forever, but it does give stakeholders a whole extra year to petition Government, if they so wished, to amend the reforms.
What does this mean for you and your company?
Firstly, it doesn’t mean that all of your hard work preparing for the IR35 changes has gone to waste.
Processes and Status Determination Statements
In all likelihood you will still need those documents and processes when the time comes; albeit possibly with some adjustments. It does mean that you no longer have to make, share and keep status determination statements (SDS) and you will not be required to complete RTI submissions or make PAYE deductions.
If you had already made rate adjustments to compensate contractors for their increased costs, there may be a temptation to have a discussion with the contractor about this. Note of caution though; theoretically if you increased rates to cover increased tax burdens due to an inside determinations then those tax burdens will still apply.
Just to reiterate – a contract with an inside SDS is still within IR35 irrespective of this delay, it’s just that the contractor should be making the deductions themselves.
Due to the Criminal Finance Act, if a client or recruitment agency knowingly allows a contractor to avoid PAYE taxes by ignoring an “inside” determination they are putting themselves at risk of a corporate offence. For contractors where an inside SDS has already been issued we’d suggest you get written confirmation and proof from the contractor that they will be making the PAYE deductions themselves, even if they’re continuing to work through their own PSC.
Also, in an uncertain financial climate contractors are going to be unlikely to welcome a rate cut even if they’ve only just received the increase. The balance to this of course is that, for many companies, finances are predicted to be squeezed and increased contractor rates may no longer be an option.
If you had been planning on switching a contractor onto a fixed term contract then you may wish to no longer do that. If that’s the case then, of course, you’ll need to discuss this with your contractor and any recruitment agency involved. Some companies had also banned PSC altogether. If that is the case you may wish to reverse that decision in the short-term, or you may wish to continue knowing that these changes will come into effect in 12 months anyway.
What does this mean for contractors who are currently on-site?
We would strongly recommend you tell your contractors immediately about the changes you plan to make. The most important thing to bear in mind is that, if a contract has been deemed inside of IR35 as part of your status determination process then it remains inside of IR35.
The difference is that, now this postponement has been announced, it is down to the contractor to determine if their contract is inside or outside of IR35 and to make the appropriate deductions and submissions. The risk of an incorrect determination has now moved back to the contractor, but with the added complication that there may now be a piece of paper proving they should be within IR35. If they had moved to an umbrella company then they may no longer wish to do this, however clients and recruitment agencies may require proof of deductions.
HMRC had previously said that they would not be using new inside IR35 determinations as a reason to look back on historical taxes. Hopefully that will continue to be the case. HMRC, however, has many things to balance at the moment including a significant deficit whilst not penalising self-employed workers when they’re already under financial pressures. This delay means that penalties for any incorrectly applied taxes return to the contractor, but there is a risk for clients and recruitment agencies for anyone who has already been issued a SDS.
As has been the case throughout the IR35 changes process, communication between clients, contractor and recruitment agency is going to be key. We will be working closely with all of our contractors and clients to help guide them through this latest change in legislation.
In the current financial market we predict a significant increase in contractors plugging any gaps so this is very welcome news for both clients and contractors alike. This is not the last we have heard of the private sector IR35 changes but we expect it will go quiet for a while whilst other issues take priority. As we have done throughout this process we will continue to keep you updated regarding any changes that may come, including the new implementation date.