The government has announced that the planned reforms to IR35 will now take effect on 6 April 2021.
This is one of the measures that the government has introduced to help businesses and individuals in light of the coronavirus pandemic. The proposed IR35 reforms will now be deferred for one year, taking effect on 6 April 2021 instead of 6 April 2020 as previously planned (for further details please see "IR35 reforms from April 2020").
The government had previously resisted all pressure to delay or amend the proposals. However, this is clearly a deferral of the reforms rather than an abandonment, and the government remains committed to introducing them. The postponement will come as an enormous relief to businesses that were struggling to prepare for this significant change to employment tax while dealing with the issues introduced by the fast-changing coronavirus situation.
What IR35 changes were planned?
IR35 applies where a contractor provides services to an end user via a personal services company (PSC) or other intermediary but, if the contractor was engaged directly, they would be an employee for tax purposes. Currently, contractors are supposed to operate pay-as-you-earn (PAYE) and deduct national insurance contributions (NICs) if IR35 applies.
This was all set to change for any payments made on or after 6 April 2020, with the end user becoming responsible for assessing whether IR35 applied and the fee payer (ie, the entity contracting with the PSC, which may or may not be the same as the end user) becoming responsible for operating PAYE and NICs and paying employer NICs and the apprenticeship levy where it did.
What should businesses and contractors do now?
End users must decide what to do in 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 operate PAYE or NICs.
End users no longer have to:
- undertake a determination – whether using Check Employment Status for Tax (CEST), IR35 Shield or any other tool; or
- issue a status determination statement.
However, end users may see a benefit in doing a quick CEST check (even though CEST may well change again before April 2021) in order to identify whether a contractor falls inside IR35 in the future. In this case, end users may want to consider in advance whether any practice changes might make a difference or whether it would be preferable to contract with an individual as an employee.
Some end users have already taken steps to migrate contractors onto different arrangements or instructed agencies to supply contractors on a different basis. Those end users will need to think about whether to backtrack or stick with the new arrangements on the basis that the reforms are still set to come into force eventually. In many cases, it may be too late to backtrack if the arrangements with contractors have already terminated.
Contractors which are continuing to provide labour through their PSCs will need to complete their tax returns for the coming year and self-assess their IR35 status (as is already the case). If they have already received a status determination statement from their end user under the planned reforms, they will need to consider whether and how it affects their self-assessment exercise.
Despite the postponement of the changes, it would be good practice to continue to include the new IR35 wording that has been inserted into templates in:
- PSC contractor agreements;
- agency and umbrella agreements;
- supply of staff agreements; and
- managed service agreements.
However, if the wording says something similar to "anticipated to come into force on 6 April 2020", it should be altered to 6 April 2021.
Businesses which use standard business terms and conditions should use the postponement to ensure the following:
- Businesses that provide managed services (rather than staff) should welcome this opportunity for an additional year in which to educate their customers about the fact that IR35 does not apply to them.
- All businesses, whether they supply staff or managed services, should ensure that their terms and conditions are up to date in anticipation of the IR35 changes, no matter when it comes in, so that any contracts entered into during the coming year will already be under IR35 compliant terms. However, different IR35 wording will be needed depending on whether a business is supplying staff or managed services.
- Businesses which have, until now, run numerous models – including secondment of staff, supply of staff to clients or managed services – while using very similar or even identical business terms and conditions should use this opportunity to delineate their business models, create separate terms for each model and train those who use them on when to use which terms.
Overall, the decision to postpone the IR35 changes is welcome in unsettling times for businesses that use PSC contractors, as it will give them greater freedom to use such contractors for the coming year without the extra employer NICs and potentially apprenticeship levy costs or the administrative burden of doing so.
