IR35: What you missed during furlough
It’s no exaggeration to say that the COVID-19 pandemic has changed a lot of plans, and the government’s intended IR35 rollout is no exception. For several years, contractors and businesses that hire them were expecting the controversial tax legislation to be implemented in the private sector in April 2020. However, to give businesses one less thing to worry about during coronavirus, this is no longer the case.
You can be forgiven for not realising anything has changed; after all, so many of us have been furloughed recently that the world of work has slipped our minds! However, if you are a contractor or anyone looking to engage with flexible workers, you need to catch up on what’s been going on with IR35.
What has changed?
The last many of us heard about IR35 was back in February, when Eamonn Holmes lost his case against HMRC and was found to owe around £250,000 in back taxes. At the time, it was thought this would be among the last high-profile IR35 case where the responsibility for determining employment status fell on the contractor, as changes to the legislation were expected to roll out on April 6th.
However, this all changed on March 17th, when the government announced the IR35 changes were to be delayed a year, being rolled out on April 6th 2021. This announcement came as part of a large bundle of measures to help UK businesses amid the COVID-19 pandemic, aimed at giving those that haven’t already done so, more time to audit their workforce and put processes in place prior to the implementation.
This delay presented an opportunity to once again challenge the planned private sector roll out, as several attacks on the proposed IR35 reforms came into play, including a review of off-payroll working by the Economic Affairs Committee of the House of Lords.
House of Lords review
One of the biggest criticisms of the IR35 rollout has come from the House of Lords, which published a report on April 27th entitled “Off-payroll working: treating people fairly”. In it, the Economic Affairs Committee urged the government to rethink not only the plans to roll out IR35 changes to the private sector, but also the entire framework of tax compliance for the non-employed workforce.
The report states that the government should use the delay in rolling out the changes to rethink its approach to IR35, “given the dysfunctionality of the existing system”. It added that, although the delay was undoubtedly needed due to the impact of coronavirus, “business is likely to need considerably longer than a year to recover from the disruption caused by the COVID-19 pandemic”.
The Economic Affairs Committee concluded that the best thing for the government to do would be to reassess the “flawed” IR35 framework, in addition to implementing the recommendations of the Taylor Review.
However, the government gave no indication that it had any plans to change anything and on the 1st July MP’s confirmed last night that the April 2021 implementation of IR35 in the private sector would be going ahead when they voted down an amendment to the Finance Bill during its report stage in the House of Commons, confirming what we have been warning businesses: they need to audit their flexible workforce and be ready for April 2021.
Reasonable care: The details
So, what will be in the guidance? While nothing is currently official, HMRC did briefly publish some of its guidance in February, apparently by accident. It’s long been known that IR35 reforms will require end clients to use “reasonable care” when assessing the tax status of off-payroll workers, but the leaked guidance explained more about what the term “reasonable care” actually means in this context.
For example, “blanket banning” is not considered reasonable care. This means end hirers cannot simply made a sweeping decision that all their temporary workers providing a service through an intermediary will lie outside or inside IR35.
Other examples provided by HMRC have highlighted what businesses need to do to demonstrate reasonable care has been taken. This includes having someone with a good understanding of the work to be undertaken involved in the determination process, applying HMRC guidance on determining status and seeking the advice of a qualified, professional advisor.
Given that IR35 is new to most businesses, it’s very unlikely that they will have someone within the business qualified and experienced enough to meet the expectations of HMRC’s and ultimately will need to seek external advice, from a qualified, professional advisor to demonstrate that reasonable care has been met and their liabilities are discharged.
We can help you demonstrate reasonable care
“Brookson Legal is an SRA regulated law firm that specialises in IR35, having completed well over 50,000 IR35 assessments on behalf of contractors and end hirers in the public and private sector, our audit process has been designed to ensure that businesses working with us can demonstrate reasonable care.”
If the IR35 status decision is challenged and found to be wrong but the end hirer is able to demonstrate that reasonable care has been taken, the liability for the unpaid tax falls onto the fee payer. However, if reasonable care has not been taken, the end hirer is responsible for the back taxes. The end hirer can also be liable if the fee player is unable to pay the debt.
This means any businesses currently or intending to work with contractors will need to make sure IR35 assessments are undertaken for each individual, to ensure reasonable care has been taken. It is also more important to analyse the supply chain, as there is now a risk of debt being transferred over from fee payers.
What happens next?
There have been several objections to the government’s IR35 plans, but nothing seems to be stopping them yet. On May 19th, David Davis MP led an amendment that would postpone the rollout until 2023-24, but this was defeated. The Institute of Chartered Accountants in England and Wales also argued the government should hold off on implementing IR35 changes in favour of reviewing them, but this hasn’t succeed and it is now full steam ahead for the implementation in 2021.
Over the summer, HMRC may try a number of tactics, including using Tribunal decisions to help generate publicity for IR35 reform. Businesses that utilise flexible workers that haven’t already done so, will need to start preparing for IR35 to be implemented in April 2021, failing to do so could be a costly mistake to make putting businesses at risk of investigations and fines from HMRC and increased difficulty in finding flexible workers who are favouring other businesses that have correctly implemented IR35.
The best option is to make sure businesses understand the complexities of IR35 and the steps needed to be IR35-compliant before time runs out. The delay has given businesses another year to get this right and avoid any financial issues. We are now ¼ of the way through this extension and it is now time to take action.
Brookson Legal is an SRA regulated law firm that provides a range of solutions to the flexible working supply chain.The Brookson Group have been supporting hirers, agencies and contractors on IR35 for over 20 years, carrying out thousands of employment status assessments each year.