IR35 Reform: Time to prepare, Andy Vessey says no to delay
It happened last year, so it might just happen again, right? With all the chaos of new lockdowns, school closures and a little bit of Brexit freight backlog thrown in for good measure – might IR35 be delayed once more? We hate to be the bearer of bad news but, unfortunately, we think the answer is “nope” – private-sector off-payroll working rules, legislation known as IR35, are likely to become law from April.
Why do we think this? Well, it’s true that a lot of contractors and end clients are still dealing with the impact of coronavirus on their business. Many are still experiencing lost income, industry shutdowns and cancelled contracts, as well as waiting to see what impact Brexit will have.
However, unlike last March, this is not a short, sharp shock, and the government is likely to think that businesses and contractors have had plenty of time to prepare for these reforms. The government has also had to pay out unprecedented amounts of financial support to get businesses through the coronavirus lockdowns, and we think they will be looking to recoup some of those losses.
Any scheme that brings in extra revenue for the Treasury will be welcomed. In this context, we think that IR35 – a legislation designed to clampdown on off-payroll working and “disguised remuneration” – is unlikely to be delayed again.
What is IR35?
If you engage contractors as an end client, or are a recruiter specialising in contractor supply, then you need to know about IR35. Hopefully it’s becoming a familiar term to you (we go on about it enough here on this blog, so there’s a wealth of resources to help you understand and prepare for the changes).
IR35 is the term given to a group of legislation around the idea of “off-payroll working”. The reforms have been introduced to try to stop people avoiding tax by offering their services through a limited company or other intermediary when the relationship is really more like an employment relationship than genuine contract working.
Under the legislation, if a working relationship is akin to an employment relationship, the contract is “inside IR35”, and therefore the taxation and National Insurance responsibilities that would exist if the person was an employee apply. Genuine contract working relationships, however, would fall outside the legislation and continue as before.
Will IR35 be delayed?
Andy Vessey ATT, Kingsbridge’s Head of Tax and IR35 guru, comments “Businesses should not rely on the possibility that the government might further postpone the legislation for another year due to Covid; there are no noises coming out of the Treasury that the IR35 reforms are going to be delayed and therefore it is prudent that businesses forge ahead with their preparations.
According to the government, postponing the reforms in 2020/21 cost the Exchequer £1.9BN. Coupled with the fact that medium and large-sized businesses have had an additional year to get ready, and assuming that the vaccine programme is successful, the government’s view may well be that there is no good reason to further delay the reforms. Prepare now and avoid later panic when mistakes can be made.”
The message is clear: businesses need to plan now so that they are ready come April, and burying your head in the sand and hoping it might all go away is not a smart strategy. But what are the changes, and what do businesses need to do to prepare for them?
I’m an end client, what does this mean for me?
What this means for businesses employing contractors is that each engagement must be assessed, and a status determination produced which tells the worker their employment status for tax purposes, and gives the reasons for this determination. The law says that you must take “reasonable care” when making a determination.
From April, the responsibility for producing status determinations lies with the end client if they are a medium or large-sized business in the private sector (it already applies to public sector clients). For small companies, the responsibility for status determination stays with the intermediary (usually the worker’s limited company).
It’s important to demonstrate that you’ve followed a process and have considered reasons for any determination. A worker may challenge your determination, so it’s important not to rely on blanket determinations (e.g. declaring all contractors inside IR35 just because that seems easier).
How do I prepare to produce status determinations for IR35?
The government does provide its own tool, CEST, that claims to help you decide if off-payroll rules apply, but we find it can be inconclusive in a lot of cases. Similarly, there are accounting and legal consultancy firms that offer a bespoke service to assess contracts, but these can be time-intensive and costly, especially if you employ a lot of contract workers and hire frequently.
That’s why we’ve come up with a smart, hybrid solution: the Kingsbridge Status Tool. Our Status Tool offers the best of both worlds: an online questionnaire that can provide an indicative determination in minutes, combined with expert support to assess more complex cases or anything where you feel you’d like us to take a second look.
The tool has been based on up-to-date case law as well as government guidance and has been developed by Andy Vessey, Head of Tax at Kingsbridge. Andy has many years of experience defending IR35 cases in the courts and has defended more IR35 cases than anyone else in the industry.
What should I be telling my contractors?
They need to get prepared too – we’ve written a handy guide here that you could share with them. Our top tips are:
- They should check all their contracts to ensure the wording makes it clear that they are a business operating independently to provide services and that this is not an employment relationship.
- They should examine their working practices. Signifiers of genuine self-employment shouldn’t just be written in the contact, they should be a reflection of how their relationships with clients like you work.
- They should discuss with their clients and recruitment agencies (if they use them) to highlight any changes to contracts or working practices, or simply to lay out their evidence.
Avoid delay and panic by taking action now to get prepared for April. Then you can be assured that your all stages in your contractor supply chain are all ready to move smoothly into the new processes.
If you need some support with your preparations, like staff training, legal advice or assessment of contracts, Kingsbridge’s complete IR35 solution can help ensure that there are no hiccups along the way.