Implementation of IR35 reform to be delayed until April 2021

Due to the current situation surrounding COVID-19, the UK Government has decided to delay the implementation of the IR35 reform.

Chief Treasury Secretary, Steve Barclay, announced that reform to IR35 will be suspended for a year until 6 April 2021. The move comes amongst a range of measures in support of small businesses.

In his speech to the House of Commons, Barclay said: “This is a deferral in response to the ongoing spread of COVID-19 to help businesses and individuals.” He stressed that this “is a deferral and not a cancellation, and the Government remains committed to reintroducing this policy to ensure people working like employees but through their own limited company pay broadly the same amount of tax as those employed directly.”

IR35 was introduced by HMRC in 2000 to assess whether a contractor is genuine or a ‘disguised employee’.

The off-payroll working rules were designed to ensure that those who worked as employees, but through their own personal service company (PSC), pay the same Income Tax and National Insurance contributions as other employees.

HMRC estimates around 230,000 PSCs used by contractors may be affected by the change of rules. It believes that while two-thirds of these people are genuinely self-employed, around one-third may be disguised employees.

What changes have been made to IR35?

The changes, which was introduced to the public sector in April 2017, are to be extended to the private sector from April 2021.

The new rules will mean that responsibility for operating the off-payroll working rules from the individuals PSC will shift to the business or organisation they are supplying their services to. The business or organisation will also have the responsibility of deciding whether the employment taxes and National Insurance contributions should be deducted.

Do these changes affect you?

The government defines those who are likely to be affected by the new tax law as:

• Individuals who supply their services through an intermediary, such as a PSC and who would be employed if engaged directly.
• Medium and large-sized organisation outside the public sector that engage with individuals through PSCs. Public sector organisations have been affected by these changes from April 2017 onwards.
• Recruitment agencies and other intermediaries supplying staff through PSCs.

Medium and large-sized private sector clients must apply the rules if they meet 2 or more of these conditions:

• You have an annual turnover of more than £10.2 million
• You have a balance sheet total of more than £5.1 million
• You have more than 50 employees

They key question is whether the relationship between the individual and the business engaging the services is akin to an employment relationship. This will require careful consideration. If you are a private sector client and meet these conditions, you must apply these rules from April 6th, 2021.