Chancellor Rishi Sunak will deliver a Budget next month, hopefully plotting our course out of the Covid19 crisis. Whilst he has become a very familiar face as a result of the pandemic, it will only actually be Mr Sunak’s second Budget since his first last-minute statement in March 2020 which saw him postpone the introduction of the IR35 off-payroll rules for 12 months. Will Budget 2021 be an IR35 déjà vu?
The ongoing pandemic has caused some to speculate that there could be another delay to the introduction of the IR35 rules beyond 6 April 2021 when they are due to take effect. With the rate of unemployment predicted to increase in coming months and bearing in mind limited company contractors have received very little from the Government’s Covid19 support measures, there are arguments for maintaining the current status quo for both contractors and their clients. However, we believe further delays in this legislation to be unlikely.
HMRC confirms soft landing in new IR35 guidance
The reason being, to prepare for the new rules taking effect from 6 April 2021, HMRC has just published a document outlining its IR35 compliance strategy, signalling to us that there will be no further delays. That said, two positives come out of their latest publication:
- HMRC has confirmed a light touch approach to penalties, saying “you will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months of the operation of the new rules, unless there’s evidence of deliberate non-compliance” and
- They have tried to allay concerns that information collected under the new regime will be used to open enquiries into returns for previous years, with HMRC saying “we have also committed that we will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour”.
what does IR35 currently look like?
Currently, when a contractor works for another business through his or her own company, they can avoid paying National Insurance (“NIC”) on their earnings and they can also generate income tax efficiencies and savings.
However, if the reality of the contract and the duties performed thereunder mean the individual is providing services that would be treated as employment but for the existence of their company, the existing IR35 rules require the contractor to deduct income tax and NIC from payments made to their company (referred to as their Personal Service Company or “PSC”).
Why the ‘sudden’ need to reform ir35?
In theory this principle sounds straightforward, but during the 20 years the current IR35 legislation has been in place, the Government believes that not all PSCs have operated the rules correctly. In fact, according to HMRC, it is possible that only 10% of PSC owners have been assessing their status correctly.
As a consequence, the Exchequer’s tax take has been much less than it perhaps otherwise should have been, and hence Government has decided it is time to take the IR35 decision making responsibility away from PSCs and their owners.
Who is making the decisions from 6 April 2021?
From 6 April 2021, responsibility for the PSC owner to determine their own IR35 status shifts to the business or organisation benefitting from their services. Effectively it will be the PSC’s client or customer who is obliged to ensure IR35 is operated correctly.
Businesses and organisations engaging individuals through PSCs will therefore need to assess each individual’s IR35 status to determine whether their contractual and perhaps more importantly day-to-day working relationship is one of a true contractor/client or one of employee/employer, and if the latter it is likely both the PSC owner and their client will incur additional financial costs in terms of, specifically, NIC.
This general rule applies to most businesses, however, there is an exemption for small businesses.
Two versions of IR35 running side by side?
Where an individual provides their services through their PSC to an end user client that is considered to be small, the new IR35 rules can be ignored and responsibility for adhering to the rules as they are today – where the PSC owner determines their own employment status and accounts for their own income tax and NIC – remains with the PSC owner. Effectively, from 6 April 2021, we will have two versions of IR35 running side by side.
For the purposes of IR35 the definition of small is lifted from the Companies Act, whereby if a business meets at least two of the following tests it will be considered small:
- Turnover less than £10.2million
- Balance sheet assets less than £5.1million
- 50 or fewer employees
For unincorporated businesses such as traditional partnerships, a simplified test based on the turnover figure above applies, however, and as with all things tax related, the devil is in the detail and the definition of small is not always straightforward, particularly when considering scenarios involving groups of companies, businesses in common ownership, joint ventures and the like.
We envisage many businesses will rely on being deemed small to remove the burden that will otherwise be placed on them by IR35 from 6 April 2021, and we recommend advice is taken and retained to confirm the position and why.
What should businesses do to prepare?
It is possible that Mr Sunak might mothball the IR35 rules again, but if that were to happen it would almost certainly come with a root and branch consultation on reform of employment status determination, NIC on earnings, taxation of private company dividends, and the list goes on. So, on the basis the new IR35 regime will commence on 6 April 2021, businesses should:
- Determine whether they are deemed small for IR35 purposes and do this even if they do not currently have contractors working for them, as if they engage with an individual via a PSC in the future, they will be required to tell them whether or not they are deemed small for IR35.
- Understand their supply chains and identify all individuals engaged via a PSC to determine those who will be deemed employees for tax purposes under the new IR35 regime. This may not be immediately obvious and we have seen some wrinkles when it comes to franchisor/franchisee arrangements for example.
- Calculate any likely cost (income tax, NIC and apprenticeship levy) increases arising under IR35.
- Ensure each area within the business understands their responsibilities and takes ownership, training them where necessary and especially when it comes to determining IR35 employment status.
- Communicate with contractors now to ensure they are aware of the changes and of the decisions that need to be made, and to avoid any disruption to the workforces post 6 April 2021.
The new IR35 rules are likely to increase the Government’s tax take, which is undeniably required at present to help fund the fight against Covid19 and hopefully a controlled exit from the current pandemic. Nonetheless, unless the Chancellor freezes implementation in favour of consulting on wider reforms, businesses must act now to understand and protect their position.
We have advised a number of businesses in relation to the impact of the new IR35 regime and the preparations required to meet the obligations to be imposed upon them. This is not always a simple process, more so if a business has a large population of contractors or agency supplied workers.
We will of course share any comments and positions arising from the Budget on 3 March 2021, but in the meantime, please do get in touch if you have any queries or concerns regarding your own position or that of your business.