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What impact does COVID-19 have on IR35?

Matt Parfitt Matt Parfitt

Two of the biggest challenges for medium and larger private sector businesses in 2020 have been the effect of COVID-19 and the off-payroll working reforms known as IR35. Matt Parfitt looks at how these two challenges interact.

In July we wrote about IR35 reform for the private sector – and whether it will happen now. The situation, like everything we had planned for 2020, has been affected by COVID-19. But, other than the 12-month delay to the implementation date, what other impacts has coronavirus had on IR35?

First, the gift of an extra year to prepare has largely been welcomed, although some businesses have perhaps taken the delay to mean the reform will be cancelled and are leaving little time now to prepare. For those that are using the extension productively, some are rethinking their approach, which leads in nicely to my next point.

Rethinking the value of a flexible workforce

Given the uncertainty throughout 2020 and the stop-start nature of some of the UK restrictions on businesses, the value of a flexible workforce is perhaps better understood than ever.

There are some important, legitimate commercial reasons why contractors can be an invaluable option for resourcing projects and coronavirus has, perhaps, highlighted this.

Businesses that were using a sledgehammer to crack a nut – by taking a blanket approach to IR35 and assessing all contractors as ‘inside-IR35’-deemed employees, or telling all contractors that they must become contractual employees – are starting to realise this may not be the commercial answer. Some businesses disengaged from contractors altogether, but have already reversed this decision or are reconsidering it.

I even recall a contact suggesting that their organisation may seek to use contractors more going forwards. This is because they didn’t have the same duty of care to contractors as they did employees, from a health and safety perspective, given the workplace restrictions and perhaps growing nervousness over the legal ramifications of employees contracting the virus at work.

I can’t comment on the legal position but this is a valuable demonstration of some of the thought processes that employers are going through around IR35 and COVID-19.

Shifting the focus to cost in a challenging economy

Another reason for reconsidering taking a previous blanket approach is the cost.

Given the current economic outlook and significant difficulties for some businesses and sectors, the additional national insurance contribution cost of assessing overly prudently and a potentially short-sighted 'compliance at all costs' approach has come sharply into focus. And this is the right approach. IR35 assessment is a balance between the tax and people risk, and over-compliance could even be more costly, particularly if HMRC were to contest that reasonable care is not being taken by the business and could undermine the other IR35 assessments of the business.

Under-compliance can also come with a cost if HMRC were to challenge any assessments as the PAYE and NIC risk would now sit with the business that is the end-client or that failed to properly pass the Status Determination Statement along the chain, or the fee-payer if failing to operate PAYE and NIC where instructed to do so for an ‘inside IR35’ assessment. HMRC may also impose penalties and charge interest on any unpaid income tax and NIC.

Let’s also not overlook the potential cost of the administrative burden of contractor appeals and disputes. The legislation states that a contractor can appeal an assessment and the business must respond within 45 days with either an updated assessment or to reaffirm the original assessment. Strangely, there is nothing that limits a contractor to only one appeal and so they could theoretically continue to raise dispute after dispute, although one would not expect them to prejudice their client engagements.

Also, if assessed inside IR35, there is a potential increased risk that a contractor could make claims for holiday pay and other employment rights, or at least basic ‘worker’ rights. Being deemed an employee for tax purposes does not make someone an employee under employment law but there are clearly similarities and this fact wouldn’t stop someone from making a claim regardless, some of which could come with a cost.

Although some engagements should correctly be classified as inside IR35, there are legitimate reasons why others will be outside. It may even be possible to amend the underlying contractual terms and working practices of some engagements in order to ensure that a self-employed assessment is supportable, however professional advice would be advisable in this situation.

The key point is that it is important and worthwhile putting the time in to assessing status correctly. Even if this comes with a cost, it could well be a far smaller cost in the long run than being either under- or over-compliant. Therefore, it is crucial to have adequate processes in place for accurate and timely assessments, and to be wary of the well-publicised limitations of HMRC’s 'check employment status for tax' (CEST) tool.

Less resistance from contractors

A potential positive aspect for businesses is that some contractors are perhaps now less reluctant to be treated as employees. IR35 can be a highly charged emotive issue for contractors who often object to being treated and taxed like an employee.

However, with the additional protection that employees have been afforded recently with the Coronavirus Job Retention Scheme (CJRS), aka furlough scheme, there may be a shift in mindset from some contractors. For some, it may not be so bad after all to have the additional rights of being moved to an employment model where businesses are doing this.

Evolution of working patterns and employment status tests

Finally, the actual assessment of an individual as employed or self-employed may well shift as a result of changing working patterns. Note that IR35 assessment uses the exact same principles as a sole trader’s employed versus self-employed status assessment. The difficulty with employment status is that the legislation itself is extremely vague and hence the rules are built upon a wealth of case law – effectively the decisions of judges in tribunal cases over the decades. Case law is constantly evolving and hence it might be many years before we see tribunal decisions about workers being assessed based on post-coronavirus working patterns. Hence, we may not know if and how judges see things differently until it is already too late for current engagements.

As a couple of examples: is the location where someone performs their services/work as important as it used to be? If someone is working some or all of the time at home then does this indicate that they have more control over where they work or does this just mean this has become the normal, or even that they were explicitly in lockdown? Also having a dedicated office at home might have been seen as a business premise and a potential indicator of self-employment, yet many more are now having dedicated offices built at home as this becomes the new way of working.

This is a bit of a 'watch this space' scenario. These factors may be fairly minor when looking at the big picture of employment status, but could be enough to swing borderline cases and we don’t yet know how judges will interpret evolving working patterns.

Summary

It may be early days in some respects and we don’t know how the ongoing pandemic will evolve. There may yet be further considerations but at the least working patterns have permanently changed, there has been a shift in mindset from both contractors and the businesses using their services, and we are now in a significantly different and more cost-conscious economic scenario than this time last year.

If anything is certain it is that it is important for businesses to prepare for April 2021 and ensure a robust implementation of the IR35 reforms.

For further information, visit our employment status page.

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