In March the government pushed back IR35 changes until April 2021. Bethan Gill considers if the delay might become a permanent cancellation.
As the country went into lockdown in mid-March, the government announced an 11th-hour delay to the off-payroll working (OPW) reforms, also known as IR35, that were due to come into force on 6 April 2020. What are the reforms – and are they just delayed or could they be cancelled?
What is IR35 reform?
The IR35 rules were designed to ensure that those who are deemed to be avoiding employment taxes by working through their own company pay the same amount of tax as actual employees. Introduced in 2000, the original legislation put the onus on the self-employed worker to apply the rules. However, it was estimated that this was not being done correctly in 90% of cases.
The latest IR35 reforms placed the obligation to assess employment status and withhold the appropriate taxes onto the end client where they are a medium or large business.
This represented a significant change to processes and procedures for a lot of businesses, as well as concern over potential resourcing constraints as contractors reacted to the decisions made. Many businesses, including us at Grant Thornton, had spent a lot of time and money preparing for the reforms to ensure that we were ready for April 2020.
Given the lateness of the announcement of the IR35 reform delay, the initial feelings among our client base were a mixture of frustration and relief. Frustration that all the hard work already done to prepare for the changes may have been wasted. And relief that this area could now be de-prioritised while businesses needed to focus on the implications of COVID-19.
The big question was whether the reforms would actually go ahead at all?
Could the changes be scrapped?
The government were always clear that this was a delay rather than a cancellation. However there was a significant campaign calling for it to be scrapped completely before it was enacted.
For me, this was always an improbable outcome, mainly due to the fact that it is already in place for the public sector so there is a question of equity. The public sector reforms, introduced in April 2017, were deemed successful due to the amount of additional tax revenues that they generated (reported at £410 million in its first year). With the current pressures on the economy due to coronavirus impacts, it is unlikely that the government will give up this source of income from the private sector. And if it does for one, it should really do for the other.
The counter argument for cancellation is that the seeming ‘attack’ on self-employed contractors is damaging for the economy and not supportive of growth. As this is difficult to quantify, however, it is more likely that the government will go for the more easily estimated and collected revenue generator.
IR35 reform only delayed to April 2021
This was effectively confirmed on Wednesday 1 July when the draft OPW legislation contained in the Finance Bill successfully passed through the report stage in the House of Commons, with no amendments to the legislation. This means it is now almost certain that what is known as the IR35 legislation will become law in April 2021. This will be confirmed when the Finance Bill receives Royal Assent, which is expected before the summer recess for Parliament.
With that being the case we recommend a strong return of focus to this in the autumn, hopefully as the fog from lockdown is starting to clear. In a future post, we will be sharing our top tips to prepare for the reforms, using insights from our own and our clients’ experiences of preparing for the reforms to be implemented in April 2021.