IR35 changes postponed to April 2021: implications for suppliers and users
Published on 18th Mar 2020
Yesterday evening (17 March), Treasury Minister Stephen Barclay announced in the House of Commons that the proposed IR35 changes would be delayed until April 2021 as part of the effort to minimise the economic impact of COVID-19.
According to the announcement this is merely a delay and the government is committed to make the changes which it describes as a matter of fairness.
The good news
At one level this is clearly good news. Many organisations were struggling with making the necessary changes and the impact of COVID-19 was clearly not helping this and many personal service companies (PSC) contractors will face less immediate uncertainty about their incomes.
Alongside this, many end users and suppliers will have time, where appropriate, to properly implement engagement models which fall outside the new regime or adopt more streamlined and automated processes for assessing the status of PSC contractors.
The delay may also allow some of the technical problems with the proposed new regime to be ironed out. People will hope for clearer guidance around certain issues that are already causing difficulty, such as:
- Ongoing concerns about the usefulness in many situations of HMRC's CEST tool;
- The impact of the Managed Service Company (MSC anti-tax avoidance legislation on some of the compliance and insurance services that have sprung up in the last year or so;
- The "right to review" process.
- The interplay between CIS and IR35.
- When exactly an end user will be liable in circumstances where the intermediary via which they engage the contractor fails to pay the tax.
- How to use umbrella companies in a way that is safe.
- How to operate the deemed employment payment.
Many suppliers and users of the services of PSCs have understandably already taken action to deal with the expected commencement of the new rules on 6 April 2020. It may not be a simple exercise to go back to their previous approach to supplying and engaging PSC contractors.
In particular many organisations have already taken the following steps:
- Some have prohibited the use of PSC contractors – will they have to undo that decision if they are to retain the best contractors?
- Some have grossed up the fee rates of the most business critical contractors (in order to secure their loyalty) – can they easily reverse that without causing tax or employment law problems? Were the increases conditional on the new legislation coming into force or unconditional?
- Some have issued "inside" determinations to PSC contractors. Can they withdraw that and engage the PSC contractor knowing full well the contractor is likely to treat themself as outside IR35? Where does this sit with an end user's duties under the Criminal Finances Act to take reasonable steps to prevent tax evasion in its supply chain? Many end users will worry about this, although we do think this risk is capable of being managed.
- Some have moved, or are in the process of moving, PSC contractors over to umbrella arrangements. Can this be undone in a way which minimises tax avoidance risk for end users and staffing companies under the MSC regime? (Care will need to be taken).
- Some have moved PSC contractors into output-based statement of work arrangements in a way which falls outside the new regime, away from models which are primarily "time and materials" based. (We think they will stick to their strategy – the delay gives them a year of grace to bed down the model).
We have this morning (18 March) had messages from end users who believe they have already gone beyond the point of no return – they have terminated contracts with contractors and intermediaries and realise that in some cases they have made themselves very unpopular with contractors.
Other end users had more or less got comfortable with the idea that the regime would effectively give them more control of compliance in their supply chains – the delay may be uncomfortable for them.
Of course the impact of this delay may be dwarfed in many cases by the economic impact of COVID-19 on the types of project in which PSC contractors are often used – to the extent those get suspended these may be merely theoretical problems. But many cash-strapped businesses will need to continue with some more business critical projects, and if they want savings they may reverse their planning, in which case they will need to take care to avoid legal and tax problems.
If you have already terminated or allowed current assignments to expire and have yet to re-engage contractors you (and your agency suppliers) will have to decide whether to engage them on your old terms or on new terms (and in some cases, on a new PAYE basis). If you decide to proceed with your "old" terms it would be sensible to avoid issuing assignments for longer than 6 months.
PSC contractors whose roles have already been determined as inside IR35 (meaning that there is evidence of such a determination on file somewhere) may be wary about effectively self-determining themselves as outside IR35. It would be unwise to offer any reassurances to contractors around the government delaying the new IR35: PSC contractors could still face investigation and tax liability as long as they (and not a fee payer) remain liable as taxpayer under the current law.