Since Steve Barclay, the Chief Secretary to the Treasury announced a 12-month delay to the IR35 private sector reform in March, due to COVID-19, contractors across all industries have been left wondering what this means for them.
Can you go back to working as normal for another year or will this still have a negative effect on the working relationship between contractors and end-clients?
Delay benefits for contractors
Until April 2021, the pressure has been eased which presents several benefits for contractors, as well as clients.
Most importantly, private sector contractors can continue to follow the current IR35 rules and determine their employment status for themselves. That means contractors can carry on working through their Personal Service Company and continue to be responsible for paying their own salary and tax deductions.
Any Status Determination Statement that was issued by a client, in the private sector, is now redundant and has no legal status. It’ll therefore have no impact on a contractor’s employment or tax status, until the changes are eventually implemented in April 2021. Even by that point, it will only be of use if the contractor is still working with that client, under the same contractual conditions.
If a contractor was found by a client to be inside IR35, that determination will now have no impact. HMRC has stated that it will not seek to find out if an SDS has been issued or what it has concluded.
If you worked for a larger end client prior to the delay, you may have been informed that they’re no longer working with PSCs. Now that the responsibility placed on clients has been lifted, some may go back on their decision and reengage with contractors, which could mean more work opportunities for contractors.
Now that clients have more time to understand the off-payroll working rules and prepare for the reform, this could mean they’ll take a more educated approach to determining the employment status of contractors, instead of making a thoughtless blanket inside IR35 assessment, simply as a precautionary measure. This’ll give them chance to explore the working arrangements that could be more beneficial for both contractors and clients themselves.
A chance to become informed
For any contractors who aren’t fully aware of IR35 and the changes, this delay provides an opportunity to become educated on the subject and understand the impact it could have. This will help contractors to determine what the best strategy, going forward, will be for them in reducing the chances of a negative financial impact.
Contractors and freelancers alike can take steps to understand whether they fall inside or outside of IR35 by first understanding Mutuality of Obligation, Substitution and Control. Hiring an accountant, if you don’t already and seeking an IR35 contract review can be of great benefit to any contractor seeking clarification. Contractors can even contact HMRC directly for any extra support needed. You can find HMRC contact details for this here.
For genuine contractors and freelancers, working in a business to business capacity outside of IR35, there should be little to fear from potential HMRC investigations. For those who are genuine contractors, it’s still important to have a good understanding of IR35 and have a defence prepared, in case you are one day faced with an IR35 investigation by HMRC. Now is the time to dig out your past contracts and ensure you have all of the relevant paperwork and records organised and easily accessible, so that you can enter 2021 with your ducks in a row.
Delay benefits for end clients
While the delay may come as a relief to contractors, the same can be said for medium and large sized businesses who no longer need to fear the liability of deciding the IR35 statuses of the contractors they engage with and potentially having the expense of extra PAYE staff, if compensating for the loss of contractors who are found to be inside IR35.
Some companies may have been struggling to adjust to the changes in time for the original date of 6th April 2020. This delay will give them a chance to prepare more thoroughly for the changes, in time for 2021.
As mentioned above in the delay benefits for contractors, some companies may decide to re-engage with contractors, from now until April 2021. While this can be of benefit to contractors, it can also benefit clients too. As we navigate through a pandemic, many companies are facing major challenges, including a restricted cash supply and are consequently looking for ways to cut costs.
Working with contractors can mean getting work completed at a lower cost for the remainder of the year and into spring 2021. It also means that clients can continue to benefit from the specialised skills contractors offer.
A sector welcoming the delay is the construction industry, after contractors feared the reform would hinder flexible working.
Following the announcement of IR35 reforms to the private sector, construction contractors prepared themselves for a move back to PAYE with big clients like Balfour Beatty having already carried out blanket assessments on contractors.
Other construction contractors are said to have considered seeking work abroad following contract terminations. Research by Construction Enquirer suggests that one in three construction contractors were planning to stop contracting in the UK.
As for IT contractors and energy contractors, this delay provides a chance to reengage with clients and carefully consider the options available to you, between now and April 2021.
HMRC estimate that while two thirds of people working through a limited company are genuinely self-employed, one third are working as disguised employees.
A key issue with the reform is that it will affect genuinely self-employed individuals, who are IR35 compliant, including IT contractors.
Many private sector IT contractors, prior to the delay, were hit by this and preparing to leave their roles. Despite the majority of IT contractors being IR35 compliant, many well-established clients weren’t taking this into consideration and were instead preparing to terminate contracts and no longer work with PSC contractors altogether.
It was also believed that big IT projects within the financial services sector were at risk of collapsing without the specialised skills of the contractors they engage with.
While many clients may have opted for blanket bans due to the administrative burden incurred from carrying out individual assessments, this delay gives firms a chance to understand the other options available and to seek further legal advice. After all, they need the valuable skills of IT contractors, just as much as IT contractors need the work.
The changes to IR35 were feared to have major implications for North Sea contractors, with many preparing to leave the oil and gas sector following the reform.
Some energy contractors were preparing to work through an umbrella company, which is seen as a less preferable option, due to paying the same tax and National Insurance contributions expected of a full-time member of staff, without gaining any of the staff benefits.
While COVID-19 has caused market prices for oil and gas firms to drop, the skills and flexibility provided by contractors will be of even more value.
Will the government review the 2021 IR35 reform?
While there is currently no update on when or if the government will be reviewing the IR35 private sector reform, The House of Lords are prompting them to rethink the legislation.
The House of Lords Committee responsible for taking a closer look into the effects of the reform, deemed the new rules to be ‘riddled with problems, unfairness, and unintended consequences’.
The committee are also urging the government to do as promised and make use of the suggestions that came out of The Taylor Review, stating they will ‘call on the government to announce in six months, whether they will go ahead with introducing the proposals. The Taylor Review, chaired by Chief Executive of the Royal Society of the Arts and former adviser to Tony Blair, Matthew Taylor, is a review submitted to the government regarding employee and worker rights in the UK labour market.
You can find out more about this, here.
IR35 Contract Reviews retain their importance
While the delay has come as a relief to contractors, it’s important to remember that the decision is a deferral and not a cancellation.
Despite the House of Lords raising concerns over IR35, the government have reaffirmed their commitment to go ahead with the reform, in order to ensure fairness between contractors and PAYE staff. In particular, they would like contractors working like employees, but through their own limited company, to pay the same tax as those members of staff employed directly.
A contract review can help you prepare for the 2021 changes and provide you with some clarity on whether you’re working inside or outside of IR35.
A Contact Review is a report provided by an independent tax specialist, offering an opinion on the IR35 status of a contractor. This is done by reviewing the contractual terms and working arrangements.
To find out more about IR35 contract reviews, click here.
How Tax Enquiry and Legal Expenses insurance can protect contractors
If you’re a contractor, it’s still as important as ever to make sure you are fully compliant with tax legislation, so as to avoid penalties from HMRC.
If a contractor is thought to be working inside IR35, but claiming that they are working outside IR35, they should prepare to be investigated by HMRC.
A tax enquiry investigation can be backdated up to six years, and any owed tax from that period can be claimed back by the government.
As a contractor, holding a Tax Enquiry and Legal Expenses policy to protect you against the costs of an IR35 investigation could be key to the survival of your business.
IR35 investigations can be time consuming and costly. A tax enquiry and legal expenses policy provides £100,000 for legal representation costs in the event of a HMRC investigation.
The policy provides cover for:
- Employment disputes
- Employment compensation awards
- Property and landlord and tenant disputes
- Criminal defence
- Tax protection
- Regulatory compliance
- Court attendance costs including jury service
- Employment extra protection
- Identity theft
- Contract disputes
To find out more about tax enquiry and legal expenses insurance, click the button below or call our friendly team today on 0333 321 1403.