IR35 reform: an update
Last month the government announced a review into the implementation of the private sector IR35 reforms scheduled to take place in April 2020. So where are we now?
An IR35 timeline
- April 2000: IR35 rules were introduced, designed to tax ‘disguised employment’.
- April 2017: Public sector IR35 reform. Responsibility for determining whether IR35 applies, and for paying income tax and NICs if it does, moved from the intermediary to the public body.
- Autumn 2017 budget: Announcement that there would be a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms. Consultation took place May to August 2018.
- Autumn 2018 budget: Reform confirmed (see below at What is changing?) but delayed until April 2020 and to be limited to large and medium sized businesses. A small, and so exempt, business is one which satisfies two or more of the following conditions: annual turnover of not more than £10.2 million; balance sheet total of not more than £5.1 million; and not more than 50 employees.
- July 2019: Draft legislation published.
- October 2019: HMRC briefing confirms that the reform is not retrospective and that there will be no targeted campaigns into previous tax years. Information from the changes will only be used to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.
- 25 November 2019: Improvements made to CEST (‘Check Employment Status for Tax’), the online tool designed by HMRC to help assess whether a worker falls within the scope of the IR35 rules or not. Around 30 questions were updated or amended, with the aim of providing a more accurate determination. Concerns remain, however, about its accuracy in borderline cases and in certain sectors; its reliance on the right of substitution; and the fact that no account is taken of mutuality of obligation (it assumes it exists in every contractor engagement).
- 7 January 2020: Details published of the government’s review of the planned IR35 reform to “determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms”. As part of the review, the government is holding a series of roundtables with stakeholders representative of those affected by the reform, including contractor groups and medium and large-sized businesses. The government will also carry out further internal analysis, including evaluation of the enhanced CEST tool and public sector bodies’ experience of implementing the reform to the off-payroll working rules in 2017. The review is to conclude by mid-February.
- 22 January 2020: Draft Regulations published for consultation. This secondary legislation will be in addition to the Finance Act 2020 and includes provisions allowing HMRC to recover outstanding tax liabilities from other parties in the supply chain if there is no realistic prospect of recovering it from the fee payer within a reasonable time. This is not to apply to cases of genuine business failure.
- 11 March 2020: Next budget, following which the Finance Bill containing the legislation for the new rules will be published.
- 6 April 2020: IR35 changes in the private sector due to come into force. HMRC has committed to provide extensive support and guidance to help organisations comply with the amended off-payroll working rules.
What is changing?
At the moment, where an individual provides services to a business via an intermediary, it is the intermediary which is responsible for determining whether IR35 applies and, if it does, for paying tax and NICs through PAYE. An intermediary can be another individual, a partnership, an unincorporated association or a company. The most common structure is a personal service company (PSC).
From April 2020 the assessment obligation will sit with the business that engages the contractor. Should the contractor be treated as an employee for tax purposes, then the organisation which pays the PSC (the ‘fee payer’) will be responsible for the tax burden. The fee payer could be an agency; or the end-user business itself where no intermediary other than the PSC exists. As noted above, any tax liability could ultimately fall on the end-user where there is no realistic prospect of recovering it from the agency within a reasonable time.
Information sharing requirements and a status disagreement process will be imposed on the various parties in the supply chain.
The changes to IR35 will have implications for medium to large businesses across all sectors particularly oil & gas, IT, financial services and construction.
What should businesses be doing now?
It appears that the government’s current review is aimed at securing a smooth implementation of the reform rather than delaying it (particularly given the recent publication of draft secondary legislation). Therefore, businesses should continue with their preparations for April. For guidance on the changes and what to do next, get in touch with your usual Brodies contact; or go to our IR35 hub and Get Ready for IR35: Key Steps to Take.