The extension of off-payroll working rules to the private sector has been delayed until April 2021 due to the global coronavirus pandemic. Now that so many businesses from various industries are struggling to survive, the Government has announced a range of steps to protect the economy.
The delay of the reforms is just one of several decisions that have been made as part of these efforts. The news has given contractors and the companies that they collaborate with more time to make themselves compliant. The changes were originally scheduled for the 6th April 2020.
What is the purpose of IR35?
IR35 legislation is designed to ensure everyone is paying the right amount of tax, whether they are directly employed by a company or providing services as a sole trader, freelancer or limited company.
Although IR35 was first introduced back in 2000, it has rarely been out of the headlines over recent years due to the problems it has caused for contractors and businesses based in various sectors. IR35 aims to stop people working as ‘disguised employees’ in order to pay less tax.
‘Disguised employees’
When a contractor works for a company on a self-employed basis but carries out their work under the exact same conditions as an employee, they are likely to be regarded as a ‘disguised employee’.
This means their assignment will fall under IR35. Currently, contractors can determine whether they come under IR35 themselves, but this will not be the case from April 2021. Instead, the end client receiving the services will be tasked with making this decision. The Fee Payer will be responsible for collecting tax and national insurance, but this can either be the end client or the recruitment agency that has arranged the assignment.
Why the controversy?
Many companies are now going to have to make IR35 determinations themselves and face the penalties if they get it wrong.
They argue that laws around IR35 are complicated and by having to make complex legal determinations on a sub-contractors status, they will be forced in to having to hire additional highly paid staff to make these decisions.
So far Fee Payers (clients). it is bad news as they face increased risks in hiring external staff, as well as the burden of additional paperwork and the need to hire staff to administer their internal IR35 policies.
Contractors are equally scared as their clients are telling them, under the new rules, it is too risky for them to engage their services, and as a consequence their contracts or been cancelled, or not renewed, in anticipation of the new laws coming in to force.
Not a holiday
Contractors and businesses are being encouraged to avoid seeing the delay as a holiday. They should instead use it to gain a firm understanding of what’s expected of them and do everything it takes to become compliant. Nonetheless, the House of Lords has asked the Government to consider postponing the reforms again. Their report, which was published in late April, included many criticisms of the reforms and also asked them to look for alternatives to them. It said another delay should be put in place if other changes cannot be made.
Reforms seem likely to go ahead in 2021
Earlier this year, David Davis MP tabled a Finance Act amendment to postpone the reforms until the 2023/24 tax year. However, Financial Secretary to the Treasury Jesse Norman said the reforms will go ahead as planned. MPs from all parties have urged the Government to amend or delay the reforms.
Status Determination Statements
Once the reforms are implemented, the new rules must be complied with immediately. The IR35 status of all assignments must be assessed, and a Status Determination Statement must be completed. When workers are not paid directly by end hirers, Status Determination Statements or SDSs should be passed down the supply chain.
This could mean they are sent to a recruitment agency, for instance. The ‘fee payer’ will be tasked with deducting PAYE tax and National Insurance if an assignment is classed as falling inside the scope of IR35.
What if the payments aren’t deducted?
If they don’t deduct these payments, they will be liable to pay the tax and NI themselves. The contractor will not be expected to make the payments. The delay to the reforms was announced just a few weeks before they were originally due to be implemented. This meant many businesses had already made changes to comply with the new rules. Although the reforms have been delayed, the IR35 status of each assignment still needs to be determined, and the right amount of tax paid.
Can an old SRS be ignored?
Workers who received an SRS before the delay was announced should still pay attention to it. Those that don’t agree with the determination can consult a professional tax specialist to ensure the right amount of tax is paid.
The new reforms could lead to contractors taking home less than they would have previously, which is why they are being urged to consider whether they are charging sufficient amounts for their services. It’s important to bear in mind that many clients may be unwilling to accept some increases as they may have seen big rises to their own expenses because of the reforms as well as the pandemic.
Amending rates
Once the reforms have been implemented next April, assignments deemed to be inside IR35 will see Fee Payers paying NI at 13.8%. If the Fee Payer spends more than £3 million on wages each year, they will also need to pay an apprenticeship levy cost of 0.5%. It may be necessary for contractors to speak to an accountant to find out how much they should be charging to cover extra costs.
Some contractors have been considering working as part of umbrella companies in order to simplify the process of remaining compliant. However, a reputable, law-abiding umbrella service must be selected if problems are to be avoided further down the line.
Avoiding dubious schemes
Many contractors have been tempted by companies claiming that they can increase their take-home pay yet left in hot water after finding out the schemes were illegal. An experienced expert accountant can help contractors weigh up their options and decide whether to work via an umbrella company, as a limited company or a PAYE employee. They may also help contractors negotiate a better contract that delivers more protection and help them reach ‘outside IR35’ status. By acting now, they can avoid being caught out by the new legislation. The end client must let the contractor know whether the assignment comes under IR35 before the work begins.
Are small businesses affected by the reforms?
Small businesses remain unaffected by the changes, but medium and large organisations will need follow the new legislation. By remaining up to date with the latest developments, contractors can avoid sizeable penalties.
Are you worried about the new IR35 rules
There is good reason to be worried in our opinion, unfortunately. Many MPs as well as industry associations are making valid criticisms of the new rules, and if you are unfortunate enough to be affected then please give one of the experienced accountants at An Accounting Gem a call.
We can help you prepare for the new legislation, as well as offer strategies that may help lessen its impact. You can reach us on 01473 744 700 or via email at contactus@aag-accountants.co.uk.
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