The government has today (7 January 2020) launched a review into the new off-payroll working rules, known as IR35, that are due to come into effect on 6 April 2020.
The review will gather information from affected individuals and businesses, with the government saying it aims to address any concerns about how the IR35 rules will be implemented.
Financial Secretary to the Treasury Jesse Norman said: “We recognise that concerns have been raised about the forthcoming reforms to the off-payroll working rules.
“The purpose of this consultation is to make sure that the implementation of these changes in April is as smooth as possible.”
Chancellor Sajid Javid made a commitment to launch a review into IR35 in the run up to the election, saying at the time: “I want to make sure that the proposed changes are right to take forward. We’ve already said that we’re on the side of self-employed people. We will be having a review and I think it makes sense to include IR35 in that review.”
The new rules make companies responsible for assessing whether a contractor should be considered a full-time employee in the eyes of HMRC, bringing them in-line with the public sector. Previously, it was up to the worker’s personal service company (PSC).
Now, the party which pays the contractor will be required to operate PAYE or NICs as appropriate, making the hiring of contractors less attractive to medium to large businesses that IR35 applies to.
The news that the government is reviewing IR35 rules, which have come under heavy criticism from contractors who would be most affected, will be welcome, the finer details of the review will also be a blow to those who had hoped that the government might consider repealing IR35.
A petition requesting the government to repeal received over 30,000 signatures, but was closed in November, with the government responding: “The off-payroll working rules have been in place for nearly 20 years. They are designed to ensure that individuals working like employees, but through their own limited company, pay broadly the same tax and National Insurance contributions (NICs) as those who are employed directly.
“The rules support a fair tax system by ensuring that two individuals working in a similar way for the same employer pay broadly the same tax and NICs, even if one of them structures their work through a company.”
The ‘review’ was promised by most political parties pre-election as a vote-winning move. It’s nothing more than a box-ticking exercise.
Figures in the contractor community have reacted negatively to the review announcement, with Julia Kermode, Chief Executive of The Freelancer & Contractor Services Association (FCSA), saying: “This seems to be another meaningless review from a Government who seems intent on bulldozing ahead with its plans anyway. They are expecting the review to be completed by mid-February which is simply not long enough to consider the deeply complex range of issues that the Off-Payroll legislation is throwing up.
“HMRC has stated that it will be continuing its preparations to roll out the reforms in April come what may. We have also learned today that the review will focus on the implementation of the reforms rather than the reforms themselves which is not what was suggested and is not what is needed. I fear that today’s pledge is simply the Government paying lip-service to empty election promises and nothing short of an insult.”
Charlie Cox, Commercial Manager at SThree, a leading specialist STEM recruiter whose candidate base is made up of 75% contractors, said: “The ‘review’ was promised by most political parties pre-election as a vote-winning move. It’s nothing more than a box-ticking exercise. HMRC have stated that the review will determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms.
“The chances of the reforms not happening are slim to none unfortunately and it’s vital, as we’ve been saying for a long time now that UK businesses and contractors ensure they understand the legislation, are prepared for it and are working with compliant suppliers who understand the legislation. Those who get this right, will make themselves attractive to the best talent on the market and have the pick of highly skilled contractors.”
Smooth IR35 implementation
The review, which the government aims to conclude as early as February, will determine if any further steps can be taken to smoothly implement the reforms, and a separate review will assess whether any additional support is needed to ensure that the self-employed, who are not within the scope of IR35 rules, are not impacted.
This will include improving access to finance and credit, making the tax system easier to navigate and consideration of how better broadband could boost remote working opportunities.
While a review is a sign of progress it doesn’t mean the changes will be scrapped
The government has said that it will conduct a series of roundtables with stakeholders and representative of those who will be affected by the reforms, including contractor groups and medium to large-sized business.
The government has also committed to carry out further internal analyses, including an evaluation of the enhanced Check employment status for tax (CEST), which was updated in November.
Seb Maley, CEO of Qdos, said that this announcement signals that while the review fulfils the promise made by Javid, the government’s intention to still go ahead with the updated IR35 rules, saying: “The government has delivered on its promise to review IR35 reform. The fact that it will conclude before the introduction of the changes in April is also important.
“However, while a review is a sign of progress it doesn’t mean the changes will be scrapped. HMRC itself has said this review is to make sure reform is implemented smoothly, suggesting the government has every intention of rolling out needless changes irrespective of any findings.”
Maley added: “That HMRC is still under the illusion that IR35 reform only affects those ‘working like employees’ also shows just how out of touch the government is with regards to the true impact of the changes.
“Given the legislation applies to payments made on or after 6th April, which typically covers work carried out in March, there is very little time for the government to make any improvements once the review has concluded in February.
“The government also claim those who don’t comply with IR35 pay significantly less income tax and NICs than an equivalent employee. This is misleading, given the majority of tax paid on behalf of an employee is employers’ NI. HMRC must stop painting the picture that it is the worker dodging tax.
“Taking everything into consideration, our advice to contractors, agencies and private sector businesses is to assume changes will be enforced and prepare immediately.”
Deadline looms and concern will remain
Some companies have already gone as far as to establish a blanket ban on the hiring of contractors, afraid that the new IR35 rules will make hiring contractors too costly and time consuming. One example is GlaxoSmithKline, who reportedly ordered 1,500 contractors to sign on to PAYE or face the cut. Some banks are also reportedly taking the same approach.
As Accountancy Age reported in November, this reaction from businesses is of significant concern for accountants, as they face the prospect of losing freelance clients to PAYE.
Contractors will need to assess their opportunities and prioritise any outside IR35 roles, look for rate rises or working abroad contracts.
It is difficult to pinpoint just how many contractors have opted for PAYE as a result of IR35, but it could become a growing problem in the run-up to the deadline.
According to Anthony Sherick of Contractor UK, based on how banks, such as Lloyds, are approaching the new regulations, many more private sector businesses could cease to hire contractors, prompting more to opt for PAYE.
He said: “Unfortunately, some of the banks are making blanket assessments for IR35 based on current contract renewals in advance of April 2020.
“There are amazing opportunities in technology for the UK economy – but this ‘attack’ on flexible working, alongside ongoing Brexit uncertainty, will do more harm than any monetary benefits to HMRC.
“Contractors will need to assess their opportunities and prioritise any outside IR35 roles, look for rate rises or working abroad contracts. Overall, this will reduce competitiveness in the UK economy,” Sherick said.
No last-minute U-turn
Matt Fryer, Head of Legal Services at Brookson Group, said that businesses and contractors should take today’s announcement as confirmation that the new IR35 rules will be going ahead, and that preparation should be undertaken accordingly.
He said: “The government has not pledged to consider a repeal the IR35 changes in the private sector today, but to review ‘if any further steps can be taken to ensure the smooth and successful implementation of the reforms’.
“Businesses, contractors and recruiters should take today’s announcement as solid confirmation that the legislation will be coming into effect this April, as planned. The wording of the statement clearly indicates that there will be no last-minute policy U-turn. Anyone who has not taken the necessary action to prepare yet, should do so now.
“The best that can be hoped of the review is that it will address the concerning trend of large users of contract labour bypassing their obligations under the new rules by enforcing blanket bans on the use of contractors in their supply chains.
“It would also be helpful to have further clarity on responsibility for IR35 compliance within the supply chain as this will be a key issue for businesses working with recruitment agencies moving forwards. Finally, we would expect a “soft landing” post-April, with HMRC using the first 12 months to continue to educate, rather than seek to punish businesses who have not been able to get their house in order.”
Calls for a delay
Some have concerns that the review wants to achieve too much in the time that the government has given it, and some have called to delay the update to the IR35 to ensure that the review is thorough enough.
Jon Stride, Co-chair of ATT’s Technical Steering Group, said: “We are pleased that the Government has committed to further engagement regarding the operation and impact of what will be a fundamental change in how businesses engage with contractors.
“Despite today’s announcement, we reiterate our call for the introduction of these rules to the private sector to be delayed until 2021. The announcement of this review increases the need for a delay.”
Stride continued: “We note that the Government’s review is intended to conclude by mid-February, which we believe not only to be overly optimistic, but also only leaves less than two months for its findings to be put into effect.
“As the Budget will not take place until 11 March 2020, the subsequent Finance Bill containing the legislation for these rules will only be published a little over three weeks before they are due to take effect.”
ATT has said that they have concerns over the details on the draft legislation for the off-payroll rules, highlighting that it does not cover more practical issues, such as when liability can be transferred within an engagement supply chain, or what information will need to be shared by clients.
The organisation also said that they have concerns that HMRC has thus far not communicated the changes effectively, with minimal education and information campaigns.
Stride added: “Without a delay, we fear seeing low levels of compliance and increased numbers of errors and greater demand on HMRC telephone lines and staff for support at a time when their resources are already strained. We may also see risk-averse positions being taken by businesses, for example, a blanket decision to put all workers onto the payroll regardless of the nature of the arrangements, to the detriment of workers.
“The Government has previously stated that it was committed to learning from the rushed introduction of these rules to the public sector in 2017. We believe that introducing the off-payroll rules to the private sector in April 2020, when final legislation and detailed guidance are not yet available, risks repeating the errors made in the public sector, rather than learning from them.”
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