Government confirms IR35 changes will go ahead

Update

In light of the Covid-19 situation, the Government has announced a postponement of the reforms to the off-payroll working rules from 6 April this year to 6 April 2021. The Government is clear that this is a postponement and not a cancellation – and that the policy will be reintroduced next year. The delay comes amidst the Government’s latest announcement of a new package of support measures for businesses given the economic challenges of the Covid-19 outbreak.

The Government has concluded its review of the implementation of changes to the off-payroll working rules from April 2020. As expected, the Government has announced that the changes will go ahead as planned, albeit that a number of smaller measures and changes have now been announced to address some concerns over the implementation of this major reform.  

The decision, which will come as a major disappointment to the many critics of the change, does not come as a surprise, however, The Government had made it clear that the last-minute review was aimed at implementation issues, rather than the broader policy decision to make larger employers responsible for operating the IR35 rules.

Background

The IR35 legislation was introduced in 2000 to address the growing use of personal service companies (PSCs) to prevent an employment relationship arising. By doing so, both worker and engagers gain potential tax advantages, including lower amounts of both NICs (for engagers and workers) and income tax. Under the IR35 rules, where the relationship between the worker and engager would have been one of employment in the absence of the PSC, IR35 ensures that the worker's income tax and NICs liability is broadly equivalent to that of an employee and imposes a PAYE and NICs obligation on the PSC.

However, following concerns that these rules were not working effectively, in April 2017 the Government introduced changes to make engagers in the public sector responsible for ensuring the correct operation of the IR35 rules. Following further consultation, the Government announced that this approach would be extended to the private sector from April 2020, albeit restricted to large and medium businesses. The reform will mean that affected businesses in the private sector will need to determine whether a worker is a deemed employee and, if so, account for tax and NICs on their payments. Previously, it was the responsibility of the worker's PSC to apply the IR35 rules. For further details, see Off-payroll working in the private sector.

During 2019, the Government carried out consultation on implementation of these changes, resulting in the release of a Summary of Responses document which confirmed the approach to be taken by the Government in relation to a number of detailed features of the extension of the rules putting the burden of operation IR35 on the client, including requirements concerning information provisions, status disputes and the ability of HMRC to transfer liabilities up the supply chain in cases of default. For further details, see Off-payroll working rules: summary of responses.

In January 2020, the Government announced a further review intended to address concerns from businesses and affected individuals about the implementation of the changes.

Review and Conclusions

The review was intended to determine if any further steps might be taken to ensure the smooth and successful implementation of the reforms, including whether any additional support is needed to ensure that the self-employed are not impacted. The off-payroll working rules do not affect the self-employed, as only those working like employees are in scope. As part of the review, the Government committed to explore whether any further steps might be taken to support businesses in correctly determining employment status.

As expected, the review has concluded that the changes will go ahead from 6 April 2020, despite considerable and continuing opposition to them. The Government considers that the change is important to address the "fundamental unfairness of the non-compliance with the existing rules".

However, the Government has announced a number of changes:

• HMRC will take a "light touch" approach to penalties so that taxpayers will not have to pay penalties for errors relating to the off-payroll rules in the first year, except in cases of deliberate non-compliance.
• HMRC are confirming their previous commitment that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour.
• The Government will place a legal obligation on clients to respond to a request for information about their size from the agency or worker.
• The Government will amend the legislation to exclude clients which are wholly overseas organisations with no UK presence, so that the current IR35 rules will apply unchanged in this situation.
• HMRC have already published detailed guidance on the reform and clarified the position on a range of concerns raised, for example the client-led status disagreement process, including by making explicit the time limits within which a disagreement can be raised. The Employment Status Manual guidance has been further updated in line with other outcomes from this review.
• HMRC have already published a factsheet to support contractors prepare for the changes, and are continuing to step up their communications in the run up to implementation. HMRC are launching further products to support contractors in understanding the changes, including a self-help guide on how to spot tax avoidance schemes.

The Government had already announced that the rules will only apply to services carried out from 6 April 2020 onwards. The statement by HMRC notes that a common issue raised over the course of the review has been businesses' concerns over what payments the rules apply to and from when. The Government therefore made this early announcement to give businesses certainty.The rules will therefore apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out. It means organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020.

The Government has also said that it will continue to listen to stakeholders, and monitor and evaluate the operation of the rules. In particular, HMRC will commission external research into the impacts of the reform six months after implementation, including on how status assessments are being made.

Comment

The new rules will now come into force from 6 April 2020. The limited changes to be introduced by the review will simply reinforce the idea to its critics that it was little more  than a box ticking exercise.

In particular, the principal concern of many self-employed contractors is that large organisations, faced with the prospect of potentially thousands of status checks, will simply require all workers to be on-payroll, whether their own or that of any employment intermediary. This would essentially side-step rights to an individual status determination that have been promised during the earlier consultation.

More widely, the Government has promised a separate review to explore how it can better support the self-employed, including improving access to finance and credit and making the tax system easier to navigate.