The proposed IR35 reforms will be deferred for one year, taking effect on 6 April 2021 instead of 6 April 2020 as previously planned. The government announced the measure last night, to help businesses and individuals in the light of the Coronavirus outbreak. It has previously resisted all pressure to defer or amend the proposals. The government was clear, however, that this was a deferral of its proposed IR35 reforms, not an abandonment, and that it remains committed to introducing them.
This news will come as an enormous relief to businesses who were struggling to get ready for this significant change to employment tax at the same time as dealing with the issues thrown up by the fast-changing Coronavirus situation.
IR35 applies where a contractor provides services to an end user via a personal services company or other intermediary (PSC) but, if the contractor was engaged directly, they would be an employee for tax purposes. Currently, the contractor is supposed to operate PAYE and deduct NICs if IR35 applies. For any payments made on or after 6 April 2020 all of that was set to change so that the end user became responsible for assessing if IR35 applies, and the fee payer (i.e. the entity which is contracting with the PSC who may or may not be the same as the end user) became responsible for operating PAYE and NICs where it does.
End-users now need to decide what to do in the light of this last-minute announcement that the changes will be deferred to 6 April 2021. Contractors providing labour through PSCs can simply be paid as before, with no need to make any assessment of the contractor’s status for tax purposes or to operate PAYE or NICs. Some end users, however, have already taken steps to migrate contractors onto different arrangements or have already instructed agencies to supply contractors on a different basis. Those end users will need to think about whether to backtrack, or to stick with the new arrangements on the basis that the reforms are still set to come into force eventually. Contractors who are continuing to provide labour through their PSCs will need to complete their tax returns for the coming year and self-assess their own IR35 status (as is already the case). If they had already received a status determination statement from their end user under the planned reforms, they will need to consider if and how that impacts their self-assessment exercise.
In terms of the standard business terms and conditions that businesses are using:
- Businesses who actually provide managed services (rather than staff) should welcome this opportunity for an extra year in which to educate their customers about the fact that IR35 does not apply to them at all.
- All businesses, whether they supply staff or managed services, should ensure that they get their terms and conditions up to date to anticipate IR35 no matter when it comes in, so that any contracts they enter into during the coming year will already be under IR35 compliant terms. However note that different IR35 wording will be needed depending whether they are supplying staff or managed services.
- Businesses who until now have run a number of models including secondment of staff, supply of staff to clients, and/or managed services whilst using very similar or even identical business terms and conditions, should use this opportunity to delineate their business models, create separate business terms for each model, and train those who use them on when to use which terms. This is a very real issue that we have uncovered over the previous months and we are likely to run a workshop on this issue during the coming year.
In any case, this is welcome news in unsettling times for those businesses that use PSC contractors - giving business greater freedom to use such contractors without the administrative burden or the extra costs of doing so for the coming year.
Chief treasury secretary Steve Barclay this evening announced that the IR35 tax reforms would be pushed back by one year, less than a week after the controversial measures were confirmed in the Budget.