Yesterday the government announced a delay to the IR35 reforms that have caused significant confusion and concern amongst the freelancing community. Our IR35 experts at WTT explore what this might mean for you over the coming year and beyond.
Graham Webber – Director of Tax
Following many months of consultation, exchanges in and out of Parliament, yards of inches in all types of media platforms, campaigns of greater or lesser provenance, IR35 reforms have been postponed – because of Covid-19.
This has been that latest of many late announcements around these reforms. Whilst this one has some excuse, it does little to alleviate the situation for many contractors.
Those who were working at larger end clients have mostly already been told that the client is no longer engaging PSCs (and therefore no contractors) and/or have had a Status Determination Statement, saying that the role they are expected to perform after 6th April 2020, is inside IR35.
It is unlikely perhaps that they will reverse this decision (disrupting many months of planning) unless they see a very clear advantage.
That advantage may be a lower cost of hiring contractors perhaps. The present crisis is straining to the limit many company’s cash flows and it would be very possible that reducing costs becomes more attractive as this pandemic spreads. This would require end clients to be agile in their response and given that most are heavily reliant upon the agencies to advise them in this area, we must perhaps wait and see.
Those who have an inside IR35 SDS are already compromised. In the event that the end client decides that the role is now outside IR35, contractors must have regard to a possible enquiry from HMRC in 18 months time or so.
Where the contractor has prepared for an inside IR35 role by having a PSC placed into liquidation, the options are reduced further. Starting a new PSC will endanger any possible claim to Entrepreneur Relief. In the event that the outside IR35 role is agreed to, the potential loss of ER has to be borne in mind.
Perversely, those end clients and contractors who have failed to prepare for the reforms are perhaps in the best situation to take advantage of the deferral. The absence of an SDS or any audit trail of the end client having considered the situation, allows the role to viewed afresh. Be aware however that HMRC is now much better informed as to the ways in which IR35 is claimed to be avoided. Many myths around IR35 have been exposed recently and will be used by HMRC.
There will be some contractors who will see this delay as a last hurrah. It should however be better seen as a period in which to carefully consider the future and what will happen in April 2021.
Do you want to remain contracting? In which case the process of moving from daily rate contractor performing a role to consultant running a business that supplies a service and the additional risks that lie behind that decision can be considered carefully.
Now is the time to change and adapt.
Carla Roberts – Head of Legal Services
Whilst the deferral of the Off-Payroll Legislation is a very welcome step to ease pressure in the wake of the coronavirus, all parties now need to take advantage of this unexpected second chance to get this right in advance of the change.
If you are a small company The announcement makes little difference to you as long as you meet the small company criteria, you will be exempt from the reforms anyway. Nevertheless, it is important that you understand IR35 and ensure that all contractors you engage are conducting IR35 Risk Assessments to mitigate their own risk.
If you are a large company
This will be welcome news for many organisations who were struggling to make the necessary changes in time. It means that you will not be required to make status determination statements (“SDS”) until April 2021. The SDS has no legal status at the moment and companies can continue to engage contractors via their personal service companies (“PSC”) as normal.
If you are an agencyThere is a significant opportunity for you to use this extra time to properly educate end-clients and show them that rather than adopt panic measures, they can do this properly by providing them with a solution that maximises their ability to retain their contingent workforce outside IR35.
If you are a contractor You have the most decisions to make in light of the announcement. You now have more time to think about how you will offer your services to end clients- is the SOW/small consultancy model appropriate for you? Start talking to your clients about the benefits of that model. This delay provides some time and space for those who want to genuinely convert to consultancies to get some experience and track record under their belt before this comes back in 2021. In the meantime, you will be able to carry on working via your PSC and will continue to be responsible for deciding how to pay yourself and accounting for tax.
The announcements do raise some important questions, which I will address in a separate article later this week, such as if you’ve already accepted a role deemed to be inside, or where your end-client has prohibited the use of PSC’s. For now, the deferral of Off Payroll is a welcome reprieve for all parties in the supply chain. The impending legislation has achieved increased awareness of the challenges faced and now sufficient time can be taken to take considered decisions rather than making blanket determinations and/or knee-jerk reactions.
Chris Mattingly – Contractor Co-op
The reforms as intended were due to take effect in just under 3 weeks, so this delay should now allow contractors and business sufficient time to prepare.
As an umbrella we have seen a mixed response to yesterday’s announcement. Whilst some have seen it as an opportunity to maintain the status quo, many are accepting that the safest approach is to follow the Status Determination Status issued by the hirer and are proceeding with their move to umbrella payroll.
Unless a status disagreement notice has already been issued to the hirer, I would caution any contractor who has been issued a Status Determination Statement placing them ‘Inside IR35’ to now apply their own determination of ‘Outside IR35’. This would be a very risky move and for anyone unsure of their position, we would encourage them to seek specialist advice.
Tom Wallace – Director of Tax Investigations
The IR35 rules themselves were introduced on 6 April 2000, nearly 20 years ago, and have remained largely unchanged. However, it is clear that HMRC have not seen the shift they anticipated and that the determination of the status by those using Personal Service Companies (PSC’s) have been largely ignored.
The Treasury now have a black hole of at least £350bn due to recent events and will put pressure on HMRC to close that gap. It is obvious from the reforms that HMRC see the IR35 regime as largely uncompliant, and with the those now delayed they will see this area as a natural hunting ground to fill the coffers.
I expect IR35 enquiries to increase, and therefore regardless of this announcement, contractors must take care when considering every engagement and seek expert advice when required. To not do so may leave you facing large tax liabilities in the future, plus interests and penalties, which will have made the short term increase in take home a false economy.
Those that have considered the tests and are genuinely outside IR35 have little to fear, but those that continue to blanket assess (to use a popular phrase recently) all their engagements as outside IR35 need to be careful.
Rhys Thomas – Managing Director
Last night’s announcements have bought some relief for both contractors and organisations alike, but we should also spare a thought for the many for whom this news has come too late. Symptomatic of the government’s approach to the freelancing industry, it is anticipated that this last minute, short-term reprieve will be just that. Similarly, opportunities which exist for blanket determinations to be reversed, are unlikely to materialise for the largest organisations in the UK.
With this in mind contractors, agencies and organisations that benefit from the freelance industry must continue to make known the extensive detriment these reforms bring to commerce in the UK. We are active members of the Stop the Off-Payroll Campaign and we encourage you to be too. Information can be found here- https://stoptheoffpayrolltax.co.uk/industry-supporters/. More can and will be done to raise awareness here and you should play your part.
Likewise, anticipating both HMRC’s reaction to this news and their intended next steps as Tom notes above, it must be repeated that IR35 is still in existence, it is only the reforms that are suspended. That means individual contractors must continue to have their status reviewed independently (info here) and organisations must take the considerable commercial opportunities that exist to get your IR35 governance watertight, your processes documented and your freelancers educated (info here).
My overarching message from last night’s announcement is therefore, either help those pushing for change or prepare for it, preferably both. You now have a year. Use it.
We at WTT think it is imperative that you seek clear, actionable advice regarding IR35 and how it affects you. Every member of our team is available for you to speak with. If you would like to make an appointment contact us here.