Buried in the pile of government measures devised to protect the economy and help UK business and individuals survive the Covid-19 crisis was the announcement that reform to the off-payroll working rules has been delayed by a year.
As a result, unpopular changes to this IR35 legislation (also referred to as IR35 reform) will now be introduced to the private sector on April 6 2021 and not earlier last month [April], as was initially planned — this is despite the arrival of a House of Lords report that described the legislation itself as unfair and more recently, a tabled amendment to the Finance Bill that called for the changes to be postponed by two further years, until 2023 - which was overlooked in the House of Commons
While private sector reform is needless, the government did at least make the right call in delaying it by one year.
Even without Covid-19, making medium and large private sector companies responsible for deciding a contractor’s tax status (known as IR35 status), would have been disruptive.
Key Points
- The government has delayed the new IR35 rules
- It is still unclear where a contractor fits in to this
- Some employers may not hire contractors outside IR35 regardless
Doing it when the UK is at a standstill could have been chaotic, with thousands of contractors being subject to rushed, panicked and ultimately risk-averse IR35 decisions by resource-strapped and time-poor businesses whose focus is elsewhere.
This timely delay to IR35 reform in the private sector, which sees limited company contractors and consultants continue to decide if their working arrangement reflects self-employment or employment, also means these workers will carry the IR35 liability — in other words, the risk — for 12 more months.
But as welcome as this development is, there are a number of pertinent questions that independent workers — whether financial consultants or IT contractors — would like answering.
Thousands of contractors want to know what happens now.
Some common questions are: “Is there anything I need to do? Does my client’s IR35 decision stand? Can I revert to contract working if I was forced to work PAYE in anticipation of reform?”
Given working under the wrong IR35 status can result in huge retrospective tax bills for private sector contractors, I will tackle a number of the issues that have arisen as a result of the delay to reform.
What does the delay mean in layman’s terms?
Contractors will carry on assessing their own IR35 status until April 6 2021, when engaged by medium and large private sector businesses — in other words, the contractor will decide if they provide their services as a self-employed worker (outside IR35) or in a fashion that reflects employment (inside IR35).
When reform is rolled out next year, private sector companies will become responsible for administering the IR35 rules, while the liability that sits with contractors will be shifted to the party in charge of paying the worker, whether that is the client itself or the recruiter.
What can I do if my client placed me inside IR35?
Contractors do not have to accept this because their client will not become legally obliged to determine IR35 status until April 6 2021.
But while contractors can reject an inside IR35 decision they do not agree with, whether their client will re-engage them outside IR35, having already placed them inside IR35, is another question altogether.
For some businesses, it is now policy not to work with contractors who operate through personal service companies, irrespective of whether they belong inside or outside the rules.
While this is not a measured approach to reform — given the business is effectively sidestepping the incoming changes by not engaging contractors — it is something they are within their rights to do.
With this in mind, contractors who have been placed inside IR35 and want to revert back outside the scope of the legislation are advised to discuss this with their client and should it apply, their recruitment agency.
Can I overturn a blanket assessment or not?
A number of private sector companies have already reversed their decision to blanket-place all contractors inside IR35.
For contractors who — with others, whether in the same department or across the entire business — have been determined inside IR35, regardless of whether they belong there or not, this decision does not stand.
However, that is not to say a contractor can immediately return to working for that same client outside IR35.
A blanket determination — albeit technically non-compliant because it lacks ‘reasonable care’ — is a policy decision of the company.
In other words, the client holds the cards and may decide to uphold it well in advance of next year’s reform.
As frustrating as this is, contractors are likely to find many that more outside-IR35 opportunities exist as a result of the delay.
They can, therefore, reject a blanket assessment and source work as a genuine contractor elsewhere, although I am well aware that this is far from the ideal scenario.
Should I revert to outside IR35 working?
Assuming that a client is willing to engage a contractor outside IR35 — and many businesses have already backtracked on their initial blanket contractor bans since the delay was announced — the contractor must ensure their contractual terms and working practices both reflect a genuine business-to-business engagement.
Before operating outside the legislation, contractors tend to have their IR35 status reviewed by an expert. They then protect themselves with IR35 insurance, for peace of mind.
My client has not assessed my IR35 status, what should I do?
While plenty of contractors had been IR35 assessed by their client in the lead-up to the anticipated changes, many independent workers had not.
Due to the delay, these contractors do not theoretically need to do anything other than continuing to ensure their IR35 compliance for one more year when working in the private sector.
Will IR35 reform actually go ahead?
Much has been made of whether the reform will now be enforced in time. After all, in the government’s eyes, this is the second time private sector changes have been delayed.
However, while IR35 reform is a needless, short-sighted tax grab from HM Treasury, it still seems unlikely it will be scrapped.
Rolling similar changes out in the public sector in 2017 was the first step towards enforcing them in the private sector, while the government still views IR35 compliance as an area in which it can reel in revenue for the Treasury — the £1.3bn a year by the 2023/24 tax year that HMRC believes will be missing as a result of contractors abusing the rules suggests as much.
Of course, this figure seems exaggerated, as does HMRC’s view that nine in 10 contractors who ought to be working inside IR35 are currently working outside the legislation.
However, they tell you everything you need to know about how the government perceives IR35, along with the supposed level of non-compliance.
The above, plus the fact that the Finance Bill - with IR35 reform pencilled in for 2021 - is now one step closer to being signed off, means contractors, and private sector companies, need to work off the basis that it will be introduced next year.
And until then, independent workers must take responsibility for their own IR35 status and compliance when working in the private sector.
Seb Maley is chief executive of Qdos
