The Government have stressed that this is not a cancellation of the policy but a deferral only. Whilst this decision removes the immediate pressure, employers and individuals should continue to prepare for the IR35 changes, which will come into force on 6 April 2021.
What are the IR35 – off-payroll working rules?
IR35 is a piece of tax legislation that permits HMRC to collect additional payments where a contractor is an employee in all but name.
It applies where a worker provides services through their limited company or another type of intermediary to the client. An intermediary is usually the worker’s own company, but it could also be a partnership, a personal service company or an individual. Provision is made that workers, who would have been an employee if the services were provided directly to the client, pay the same tax and National Insurance Contributions (NIC) as employees.
What are the IR35 reforms?
Currently, individual contractors in the private sector can determine their employment status for tax purposes and, as such, decide whether IR35 applies to them.
Following the IR35 reforms, if your business is a medium or large size business, this contractor self-assessment will cease and will instead be the responsibility of the client or hirer (the “end-user”) to determine whether IR35 applies.
Clearly, the Government is concerned with non-compliance under the existing self-assessment regime, but these reforms will significantly impact medium and large-size organisations.
The IR35 definition of medium and large-sized organisations is based on the definition found in the Companies Act 2006, whereby two or more of the following criteria must be present:
- a turnover of more than £10.2m
- a balance sheet total of more than £5.1m
- 50 employees or more
Whilst there is an exemption for smaller businesses in the private sector, there is no such exemption for businesses operating in the public sector.
Impact of the reforms on the end-user
If the end-user determines IR35 will apply to the contractor, then the end-user is responsible for paying the required PAYE and NIC, including Employers NIC and Tax.
Impact of the delay on the end-user
Clients receiving contractors’ services must ensure they’re ready for the IR35 reforms next year. The delay will give end-users if they haven’t already, enough time to prepare and review their existing business model and its future needs.
Whilst the Government had agreed to waive non-compliance fines for the first year, this was based on the original launch date of 6 April 2020. Given the delay, the fines are likely to be strictly enforced in circumstances where businesses now have an additional year to prepare.
Businesses that get it wrong face significant liability for unpaid taxes.
Speak to Karen Cole, who can assist your business in reviewing existing contracts and practices and advise on suitable steps to protect your business.
Note: This is not legal advice; it provides information of general interest about current legal issues.