The reforms will shift the responsibility for assessing employment status to the organisations employing individuals. The rules would have applied to contractors working for medium and large organisations in the private sector, and were due to come into effect on 6 April.
Steve Barclay, Chief Secretary to the Treasury, stressed that the introduction of the rules has simply been delayed, rather than cancelled. The rules will now take effect on 6 April 2021.
In a statement, HMRC said: ‘This is part of additional support for businesses and individuals to deal with the economic impacts of COVID-19.
‘This means that the different rules that exist for inside and outside the public sector will continue to apply until 6 April 2021.’
The off-payroll rules have applied to the public sector since 2017 and, following a review of the proposed changes earlier in the year, were to be amended to include intermediaries supplying personal services in the private sector.
Commenting on the delay, Andy Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE), said: ‘The government has done the sensible thing by delaying the changes to IR35 in the private sector.
‘This is a sensible step to limit the damage to self-employed businesses in this grave and unprecedented situation, but we also urge the government to do more. It must create an emergency Income Protection Fund to keep the UK’s crucial self-employed businesses afloat.’
The ‘Intermediaries Regulations’
The Intermediaries Regulations, also known as IR35, apply to individuals who provide their personal services via an ‘intermediary’. An intermediary may be another individual, a partnership, an unincorporated association or a company; however, the most common structure is a worker providing their services via their own company – known as ‘personal service companies’ (PSCs).
The rules are specifically designed to prevent the avoidance of tax and national insurance contributions (NICs) by those using PSCs and partnerships. The rules do not stop individuals selling their services through either their own PSC or a partnership. However, they do seek to remove any possible tax advantages from doing so. Instead of allowing contractors to extract taxable profits as dividends, thereby avoiding income tax and NICs, they would need to be paid as if the payment is a salary.
The IR35 rules apply to individuals who would be classed as employees, rather than self-employed, if they supplied their services as an individual rather than through their PSC.
HMRC has made a tool known as the ‘check employment status for tax’ (CEST) tool. This is available for organisations that need to determine who IR35 applies to. https://www.gov.uk/guidance/check-employment-status-for-tax
Changes to private sector contractors
In 2017, HMRC introduced new off-payroll rules to the public sector, which saw some contractors’ net income cut significantly. The rules shifted the responsibility for IR35 compliance from the individual contractor to a public body or recruitment agency. It is intended that similar rules are applied to the private sector.
The effect of these rules will be:
- the medium or large business (the end user) will asses the status of the PSC. They will then inform the contractor (and agency paying the PSC if applicable) or their determination and reasoning. The PSC/Agency has a right to appeal the decision.
- If the PSC is deemed to be within IR35, the medium or large business (or an agency paying the PSC) will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual
- generally, the entity that pays the PSC for the services must deduct Pay as You Earn (PAYE) and employee NICs as if the deemed payment is a salary paid to an employee
- the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment, but also employer NICs on the deemed payment
- the net amount received by the PSC can be passed on to the individual without the company deducting any further PAYE and NICs.
Chancellor Rishi Sunak has promised that penalties for IR35 breaches will not be ‘heavy handed’ during the first year of the implementation of off-payroll rules to the private sector. Mr Sunak said that there will be a soft-landing penalty period where HMRC will allow organisations to adjust to new measures.
Commenting on IR35, Mr Sunak said:
‘We are shortly to publish a review of how it should be implemented with some tweaks and improvements to ensure that the transition is as seamless as possible. ‘I can also tell you that I have spent time with HMRC to ensure that they are not going to be at all heavy handed for the first year to give time to adjust as well, which is an appropriate thing to do.
‘What IR35 does is change the balance, so instead of people making the assumptions about how they should be taxed, we put the onus on the company to make that assessment for them.’
How we can help
We are always on hand to answer any questions you may have about off-payroll working. We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us.