IR35 delay: Contractors' questions answered
After months and months of preparation for the IR35 reform due to launch on 6th April, it was announced that it will be delayed until April 2021 in response to the COVID-19 crisis.
While no doubt a relief to contractors (and recruiters and end clients alike) at such a turbulent, uncertain time, this last-minute reprieve has left many with a lot of questions. Here, we attempt to answer them for you.
Why has the IR35 reform been delayed, and will it be delayed again?
The delay to the IR35 reform was one of the first measures taken by the Chancellor of the Exchequer, Rishi Sunak, to protect the self-employed in light of the COVID-19 pandemic. It was thought that introducing such legislation in a time that was already tumultuous would just cause unnecessary additional uncertainty for all involved.
Despite widespread criticism of the reform leading up to the delay, it's unlikely that we'll see a second postponement. In fact, according to IPSE, the most likely scenario based on their talks with HMRC is that the legislation will still be laid before Parliament as planned; it simply won't take effect until April 2021, effectively locking the reform in a year ahead of time.
This prediction is bolstered by an announcement made earlier this week by Financial Secretary to the Treasury, Jesse Norman. He stated to the House of Commons, during the second reading of FB 2020-21, that the Government still intends to include an amendment enacting the private sector IR35 reforms in the current bill. An amendment will be added to set the commencement date for 06/04/2021.
The government remain fully committed to introducing these reforms to ensure that people working like employees but through limited companies pay broadly the same tax as individuals who are employed directly, stated Norman. He also said that the government will use the additional time to commission further external research into the long-term effects of the reforms in the public sector before inflicting them on the private sector.
Of course, current events show us that it's difficult to predict exactly what will happen in the future, but it is advisable to assume there will be no further delays.
Could the IR35 reform be cancelled altogether?
The relevant legislation for the off-payroll reform has been omitted from the Finance Bill 2020 but, as mentioned above, it is expected to be added (with the revised start date) as a Government amendment in due course. Despite yet another letter from the House of Lords condemning the IR35 reform and imploring HMRC reconsider its approach, the Government appears to be committed to the revised April 2021 roll-out date. It would be prudent to continue your preparations as if this were the case.
Will there be further changes to the off-payroll legislation?
If IR35 legislation is indeed put before Parliament in coming weeks and locked in' then it is unlikely that any further changes will take place. However, organisations such as IPSE, APSCo and REC will continue lobbying the Government for improvements to be made as to the application of the reform, as per the recommendations from the latest House of Lords report on the subject also released earlier this week read it in full here. Contractors should work on the basis that the IR35 reform is going ahead and spend the next year getting their contracts and working practices in order, not only to protect themselves, but also to ensure they are prepared when the reform does come round in April 2021.
Does the current IR35 legislation still apply?
All current IR35 legislation (including the public sector off-payroll reform) still applies until the new legislation takes effect next April. This means that you, as a contractor, are responsible for determining your own IR35 status. This also means that you still hold all of the tax liability, and so you should continue to make sure that your contracts and working practices are all compliant with your status self-determination in case HMRC decides to investigate.
What happens if my client has already supplied a Status Determination Statement?
Remember, the IR35 reform doesn't involve any changes to the factors that affect your IR35 status. It simply changes who determines your IR35 status and who carries the tax liability.
If your client has already issued an inside' Status Determination Statement (SDS') it will have no legal standing. However, it does show how your client views your assignment and should be taken into consideration when making a decision on your IR35 status. You must take your actual working practices into account in making your determination and keep that decision under review during an assignment. Just remember, the buck stops with you for the next year so it's worth getting an independent IR35 status review be sure where you stand.
Do blanket bans and inside' rulings still apply?
Unfortunately, some organisations have already taken across-the-board decisions to bring all contractors inside IR35, or cease working with contractors altogether. As these rulings were taken at an organisational level, it is down to individual end clients to decide if they want to reverse them, which a good number are doing according to offpayroll.org.uk, a useful resource to find clients that have deferred or made a U-turn on their blanket decisions. We would, however, encourage all organisations to reconsider their blanket policies as they are closing themselves off to a talented workforce. As Nicola Hayman, Legal Manager at Kingsbridge Contractor Insurance stated, Pragmatic end clients will be happy to engage contractors outside of IR35 and will work with the supply chain to determine the status of these individuals, helping overcome reasonable care requirements whilst continuing to benefit from flexible, agile, highly-skilled workforces.
Should I continue preparing for the IR35 reform?
Yes, yes, and yes. While this delay has come about in the most awful circumstances, you should absolutely see it as an opportunity to ensure you are fully prepared for the reforms if you weren't already. As we've previously said, IR35 still applies, the delay simply means that you remain legally responsible for making the determination on your IR35 status. You may even want to consider taking advice from a third-party specialist to help make the decision.
How can I make sure I am outside IR35?
To be considered outside of IR35' you must be a genuine independent contractor. Where a contractor is working outside IR35' their PSC receives gross pay, without tax or National Insurance Contributions (NIC) being deducted. Accordingly, the relationship between the client, the PSC and the contractor who is actually performing the work must be treated as a service supply relationship.
There is one basic rule to bear in mind; does the engagement between you and your client look and feel like employment? If it does, you are more likely to be deemed inside IR35. In the event of an investigation, all parties will need to clearly demonstrate that there is an absence of at least personal service, right of control or mutuality of obligation to show an outside status.
The best course of action if to get an IR35 status review, this will give you an idea of where you stand and help identify areas the areas of your working relationship with the client that need to change.
Do I still need IR35 insurance?
This is probably more important than ever. Before the delay was announced many contractors took the view that if they weren't going to be held liable anymore, then they didn't need to insure against the risk.
IR35 is an ever-present exposure for you and you need to remain aware of the responsibility and liability you will carry for another 12 months. If IR35 is not dealt with properly it can lead to costly and lengthy cases, and possibly a monetary demand being made from HMRC so tax liability and investigation insurance are an important consideration.
Not only does the lability and risk sit with you for another year but recruiters and clients now have more time to prepare for the reform. By April 2021 most recruiters will be asking contractors to hold tax liability cover in the same way they currently ask them to hold professional indemnity and public liability cover. This was already starting to happen in the run up to 6th April 2020 before the delay was announced.
How can Kingsbridge help?
You may want to consider our IR35 Protect cover it offers up to £100,000 of cover for unpaid tax, interest and penalties in an IR35 investigation. The IR35 cover will also flex to cover whoever HMRC deems liable. This means that for the next 12 months it would cover you as the contractor. Come April 2021, the cover would flex to protect whoever in the supply chain holds liability at that point, whether this is you, your end-client or your fee payer. There is also the option to include an IR35 Status review from IR35 specialists, Larsen Howie (part of the Kingsbridge Group).