HMRC say soft landing of private sector IR35 reform will be honoured
Earlier this year, the government postponed the implementation of the IR35 reform as part of wider measures to bolster the UK economy against the COVID-19 pandemic. Chief Secretary to the Treasury Steve Barclay stressed at the time that the move was to delay the reform, not cancel it.
“This is a deferral in response to the ongoing spread of COVID-19 to help businesses and individuals,” Barclay said. “This is a deferral, 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 tax as those employed directly.”
The move came after pressure from campaigners, contractors, and the House of Lords ramped up in light of the global COVID-19 pandemic, despite the Chancellor of the Exchequer declaring just days before that the reforms would press ahead. It’s now been cemented to roll out next year, though HMRC have recently resurrected the idea of a ‘soft landing period’, something that was discussed on the run-up to the reform day.
So, what does HRMC mean when they say a ‘soft landing’, and how might it affect the private sector?
‘Soft landing’ was first mentioned for IR35 2020 deadline
With the IR35 reform due to be rolled out to the private sector on April 6th 2021, we’re now seeing the initial relief of the deadline delay turn into caution regarding the practical implications of launching the new rules for contractors, agencies, and end clients amid a global pandemic.
Due to rife campaigning against the new IR35 rules during the build-up to the initial April 2020 implementation date, Chancellor Rishi Sunak bowed to industry pressure over IR35 tax changes by promising enforcement will not be ‘heavy-handed’. He introduced a 12 month ‘soft landing’ period where there would be no penalties or fines imposed – though the tax liability still remains – on businesses who made a wrong employment status determination but could demonstrate that they took reasonable steps to comply with the off-payroll reform – i.e. it was a genuine mistake.
However, this promise was thrown into the air when the deadline delay was announced. Industry experts, including our own Head of Tax Andy Vessey, hypothesized that the chancellor’s promise of a ‘soft-landing’ would be swept under the carpet and that the year-long delay itself would be the grace period.
What does the IR35 ‘soft landing’ period mean for the private sector?
Until now, we’ve had no comment from HMRC on whether there would still be a ‘soft landing’ period. However, during agent webinars held on the 29th of October and 2nd of November 2020, HMRC confirmed that there would indeed still be making good on their previous promise of a grace period from the 6th of April 2021.
During one of the webinars, I was able to ask HMRC directly if there would still be a ‘soft landing’ period for Off-Payroll Reform as of April 2021.
They answered: “HMRC has committed not to use information acquired as a result of the changes to the off-payroll working rules to open new compliance checks for previous tax years.”
“HMRC wants to reassure workers that their intermediary entity, will not be subject to new compliance checks using information from the off payroll working reforms, for tax years prior to 6 April 2021, unless HMRC has reason to suspect fraud or other criminal behaviour”, they continued. “To underline this supportive approach, HMRC will take a light-touch approach to penalties and customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance.”
Soft landing period should not be used an excuse to pause IR35 preparations
This is undoubtably welcome news for the contracting industry which is still grappling with these reforms, along with all the other challenges faced this year. However, HMRC’s renewed promise of a soft landing should not encourage anybody to take the IR35 reform any less seriously.
“HMRC’s promise of a ‘soft landing’ further reinforces that they will be going ahead with the intended IR35 changes next year”, says Kingsbridge’s Head of Tax Andy Vessey. “For recruiters and end clients, this should not be taken as an excuse to avoid making sure you have an accurate, fair process in place ready for next year but should rather spur you on to make sure you can prove your compliance accordingly.”
“For recruitment firms, working with end-hirers and contractors to ensure determinations are being made in a fair and accurate way now will be crucial to success after April 2021”, he continues. “Keeping the momentum going on preparations, despite the challenges we’re all facing in light of COVID-19, is important if recruiters, employers, and contractors are to be in the best possible position next year as we attempt to recover from what has been a highly unprecedented 2020.”
End clients and recruiters should certainly not take their foot off the pedal and should be well-prepared for the inevitable on 6th April 2021. Lockdown 2.0 is unlikely to cause a second delay to IR35 reforms and, whilst the vast majority of PSC contractors are genuinely self-employed, processes must be put in place to ensure this talent pool can be used in a compliant way, backed by insurance for peace of mind. After all, businesses will need to rely on flexible workforces tenfold in post-COVID recovery.
Kingsbridge can help you get ready for the IR35 reform
For recruiters and end clients, you must think of your business needs and wants when choosing an assessment tool. Do you require more support or training? Do you have the luxury of waiting for status results, or do you need a quicker option? Have you got the in-house skillset and resource to assess your contractors’ IR35 statuses yourself? The likelihood is that you’ll need to outsource some help to tackle the reform in a way that safely satisfies your ‘reasonable care’ requirements.
The IR35 reform implementation date of 6th April 2021 has been cemented and with less than 6 months to go, time is quickly running out to make sure you have a suitable process in place. Last year was a practice run, but there is no room to get it wrong now. Don’t shoot yourself in the foot with gross risk-aversion. Those that invest in a good IR35 process and fair, accurate status determinations will absolutely be the ones that get the cream of the contracting crop come April next year.