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IR35 private sector reforms: Coronavirus prompts Treasury to delay start date to April 2021

HM Treasury confirms roll-out of IR35 reforms to the private sector will be halted for a year to ease the pressure on businesses in the face of the coronavirus outbreak

HM Treasury has confirmed that the introduction of the IR35 tax avoidance reforms to the private sector will be deferred until 2021 as part of a package of measures to support businesses through the Covid-19 coronavirus outbreak.

Chief secretary to the treasury Steve Barclay confirmed the move in an address to the House of Commons last night (Tuesday 17 March), several hours after chancellor Rishi Sunak announced a separate £350bn package of measures to support businesses through the economic turmoil caused by coronavirus.

Barclay said the start date for the private sector roll-out of the IR35 reforms will be postponed for 12 months until 6 April 2021.

“This is a deferral, not a cancellation, and the government remains committed to reintroducing this policy to ensure that people working like employees but through their own limited company pay broadly the same tax as those employed directly,” he said.

The reforms are aimed at clamping down on what the government calls “disguised employment” by shifting responsibility for deciding how limited company contractors should be taxed onto the medium-to-large private sector firms that engage with them.

Currently, it is down to the contractors themselves to decide whether the way they work, and the way their duties are performed, means they should be taxed in the same way as permanent employees (inside IR35) or as off-payroll workers (outside IR35).

According to the government, leaving it up to contractors to decide how they should be taxed has led to some individuals mis-classifying their engagements as outside IR35 to reduce their national insurance contributions and pay-as-you-earn (PAYE) liabilities.

Also, receiving an inside-IR35 determination means contractors are liable to pay the same tax as a permanent employee would, but are not eligible to receive employee benefits, such as paid sick leave, holiday or a pension, for example.

This has given rise to concerns in the run-up to the reforms coming into play that their introduction may contribute to the creation of a zero-rights workforce in the UK, comprising contractors who pay the same tax as permanent employees but receive none of the same benefits.

Dave Chaplin, director the Stop The Off-Payroll Tax campaign, and CEO of contractor-focused IR35 consultancy, ContractorCalculator, said in light of current world events, delaying the rollout is the right thing to do.

Even so, Chaplin’s campaigning efforts will continue apace, with a renewed emphasis on ensuring a thorough review of the legislation is undertaken.

“We must now keep pushing for changes to outlaw the disgrace of ‘zero rights employment’ and to make it illegal for firms to push employer’s taxation onto contractors. We must also push for the genuine review of IR35 legislation promised by the previous Chancellor, as part of the Conservatives planned review into self-employment,” he said.

“Over the next year, it’s time to finally overhaul the discredited IR35 legislation, which everyone knows doesn’t work and instead come up with a way to properly recognise contracting and freelancing in the tax system and ensure people are either classed as self-employed or are employees with full rights and benefits.”

Meanwhile, Andy Chamberlain, a policy director at the Association of Independent Professionals and the Self-Employed (IPSE), said delaying the reforms is a sensible thing to do as businesses battle their way through the economic difficulties caused by coronavirus.

“These changes have already undermined the incomes of many self-employed businesses across the UK,” he said. “However, they would have done even more serious damage if they had gone ahead as planned.

“It is right and responsible to delay the changes to IR35 for at least a year during the coronavirus crisis, to reduce the strain and income loss for self-employed businesses. 

“This is a sensible step to limit the damage to self-employed businesses in this grave and unprecedented situation.”

Chamberlain said the government could still afford to do more to support self-employed and freelance workers who may have had contracts cancelled or work postponed as businesses tighten their belts in response to the coronavirus outbreak.

“We urge the government to do more,” he said. “It must create an emergency income protection fund to keep the UK’s crucial self-employed businesses afloat.”

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James Poyser, CEO of contractor-focused online accountancy firm inniAccounts and founder of the website, which allows freelance workers to anonymously share feedback on how their clients are responding to the IR35 reforms, welcomed the delay, saying it should reduce some of the stress contractors are likely to find themselves under in the uncertain months ahead.  

“This means contractors can now switch gears and put all their energy into the wider challenges we are all going to face in the coming months,” he said. “While nobody can rest easy right now – permie or contractor – this announcement will make many contractors feel much better about the year ahead.”

Poyser added: “It’s clear by the scale of the £330bn financial measures made available by the Treasury today that the government wishes to keep the economic engine running as much as they can. We hope these two factors combined have an impact on the contracting market.”

The delay also means that the House of Lords review into the reforms, which is currently under way, can be published and its recommendations acted upon in a more timely fashion, he said.

However, the announced delay comes at a time when many large enterprises are already known to have made or started their preparations for the reforms, which has led to thousands of contractors leaving their posts in recent weeks.

This is either in protest at having their outside-IR35 engagements reclassified as inside IR35 or because some private sector firms opted to respond to the reforms by banning the use of limited company contractors from their workforce.

In view of this, Matthew Sharp, a specialist in tax law at European law firm Fieldfisher, said that the delay, although welcome, will have come too late for some contractors and organisations to feel the benefit.

“While the move is welcome, it will come as little comfort to those workers whose contractor relationships have already been terminated by companies too daunted by the changes to assess and adjust their contractor relationships,” he said.

“Once the current coronavirus crisis subsides, the government should use this 12-month extension to significantly improve the quality of its communication on this issue and address concerns with the efficacy of HMRC’s online tax assessment tool, which has proved to be unfit for purpose.

“Businesses, meanwhile, are urged to make the most of this reprieve to fully prepare their workforces for the new rules by mapping their current and future exposure for IR35 and ensuring they are set up to make deductions for tax where necessary.”

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