IR35 deferral – so what’s changed?
Whilst the deferral of the off-payroll legislation is a very welcome step to ease pressure in the wake of the Coronavirus and gives a bit of breathing space for clients, agencies and contractors, nothing has changed.
The reform is still coming in April 2021 and we would anticipate that HMRC will be more committed than ever to enforcing it. They need to replenish their coffers which are currently being hit hard. Therefore, 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
So long as your company meets the small company criteria, you will be exempt from the new legislation. 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 and the impact of the Coronavirus was clearly not helping this. This deferral will give them time to properly implement engagement models which fall outside the off-payroll legislation or implement more streamlined processes for conducting status determination statements (SDS).
The deferral of the legislation means that companies will not be required to make an SDS until April 2021. Presently, the SDS has no legal status. Companies can continue to engage contractors via their personal service companies (“PSC”) without worrying whether they are inside/outside IR35 as responsibility for assessing status will remain with the contractors.
However, the deferral raises its own issues:
- If an end client has already prohibited the use of PSCs, can they change that decision? The answer, in short, some companies may have gone past the point of no return if they have terminated contracts already.
- Some have issued “inside” determinations to contractors – can these be withdrawn without risking the responsibility to prevent tax evasion in the supply chain under the Criminal Finance Act? Whilst the method of payment and declaration of income for tax is not their concern until April 2021, it is possible that a role which has been deemed “inside” by an internal assessment process (even though the SDS is redundant) but which suddenly becomes “outside” for the next 12 months, could be a red flag to HMRC. This should be a concern for the PSCs you engage. Contractors should be wary about effectively self-determining themselves as outside IR35 in such circumstances.
- Some companies have transitioned contractors to SOW models – will they stick to that strategy? The delay does give them a year to adjust to that model and fully understand the difference between an outsourced service based on deliverables/milestones and fixed price as opposed to engaging contractors on a time and materials basis.
If you are an agency
There is a significant opportunity for agencies to use this extra time to properly educate their end-clients. The delay affords time to show them that rather than adopt panic measures, they can do this properly by providing solutions that maximises their ability to retain their contingent workforce outside IR35.
If you are a contractor
This is the category that has 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 the reforms bite in 2021. In the meantime, you will be able to carry on working via your PSC, while remaining responsible for deciding how to pay yourself and accounting for tax.
What if you’ve already accepted a role deemed to be inside IR35 and engaged through an umbrella company- can you still work via your PSCs? Whilst you could technically give notice to your umbrella company and then engage with the client through your PSC, we are concerned that HMRC would question how that role suddenly changed from inside to outside so we would only recommend that this be done if you have a change in role and you are satisfied that the new role is outside IR35.
The deferral of off-payroll legislation is a welcome reprieve for all parties in the supply chain. The impending reforms have 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.
If you would like to discuss any of the issues mentioned above, please do contact our legal team.