COVID-19: UK Postpones Off-Payroll Working Rules (IR35) Reforms Until 2021

Chief Secretary to the UK Treasury Stephen Barclay announced in the House of Commons on 17 March that the government’s imminent off-payroll working rules (IR35) reforms in the private sector will be postponed until 6 April 2021. The chief secretary explained that the decision to defer the reforms had been taken in view of the ongoing spread of the coronavirus (COVID-19) to help businesses and individuals.

The chief secretary emphasised that the government was committed to the proposed reforms and that this was only a temporary deferral, not a cancellation of the intended reforms.

What Is IR35?

IR35 is a shorthand way of referring to the UK’s off-payroll working rules. Originally introduced in 2000, the collection of rules aims to ensure that individuals in the UK who work for a client like an employee, but do so through an intermediary (such as their own personal services company), pay broadly the same income tax and National Insurance contributions (NICs) as other employees.

The rules were introduced in response to the growth in individuals providing services to clients through intermediaries and the perception that some of these arrangements facilitated the large-scale avoidance of income tax and NICs, depriving Her Majesty’s Revenue and Customs (HMRC) of tax receipts.

When IR35 Applies

IR35 generally applies to arrangements where four conditions are satisfied:

1. An individual is providing or obliged to provide their services personally to a client.
2. They are providing those services through an intermediary (e.g., their own limited company).
3. They have a material interest in that intermediary—generally, that they own it or have shares in it—or the payments received by the individual from the intermediary can reasonably be taken to represent payment for the individual’s services to the client.
4. The circumstances are such that, if the individual had been engaged directly by the client (and not through the intermediary), they would have been regarded as directly employed by the client.

Impact in the Private Sector

At present, if IR35 applies to a given arrangement with a private sector client, the individual and the intermediary are treated as employee and employer for income tax and NICs purposes. Sums received by the intermediary from the client are treated as employment payments by the intermediary to the individual for tax and NICs purposes.

Importantly, it is for the intermediary to determine whether or not IR35 applies to the arrangement and, if so, to operate PAYE and account for income tax and NICs on the payments that it receives from the client (subject to certain permitted deductions). All the risk therefore falls on the intermediary – the individual’s company.

What is the Proposed Change?

When the reforms are introduced in the private sector, the IR35 rules will change in three important respects where the client in the arrangement is a ‘medium’ or ‘large-sized’ employer:

1. It will become the responsibility of the client (and not the intermediary) to determine whether IR35 applies to an arrangement with an individual and their intermediary. The client must then communicate that decision (with reasons) to the individual and any agency or other organisation through which the individual and the intermediary has been engaged.
2. If IR35 applies, the ‘fee-payer’ in the contractual chain (i.e., the person that actually pays the intermediary directly) must operate PAYE and account for income tax and NICs on those payments. The fee-payer could be either the client (if it pays the intermediary directly) or it could be an agency, if the client pays fees to an agency, which in turn pays the intermediary.
3. If the client fails to comply with its new IR35 obligations it will (however the arrangement has been structured) be liable for amounts that should have been accounted for through PAYE.

The rules will not change for arrangements where the client is a small employer.

These reforms are already in place in the public sector, for which they were introduced in April 2017.

The government wishes to extend the changes into the private sector to combat (in its view) lost tax receipts. The government has estimated that noncompliance with off-payroll working rules in the private sector is growing and will reach £1.3 billion a year in lost tax revenue by 2023/24.

Impact of the Proposals

The proposed introduction of the reforms in the private sector, however, has been controversial, and many companies and contractors have taken significant steps—at considerable time and cost—in the past 12 months to prepare for the changes.

Many major companies have fundamentally changed the manner in which they engage contractors, phasing out entirely arrangements that might be caught by IR35. Whether or not IR35 applies in a given scenario is not a straightforward question to answer. It involves analysing numerous factors, including the contractual arrangements of the relevant parties and the day-to-day working arrangements in practice. It is a labour-intensive process and with no guarantee that HMRC will ultimately agree with the determination reached. The new reforms put on private sector clients significant additional compliance burdens and increased tax risks, if they wish to continue to engage the services of individuals through their own intermediaries.

Many contractors are unhappy with the proposed reforms for driving, in their view, overly cautious behaviour among their client-base, who have generally moved to phase out their typical working arrangements (and associated tax advantages).

Impact of the Postponement

Many companies will have already taken steps to address next month’s anticipated changes and either amended the manner in which they engage contractors and/or taken steps to mitigate the risks presented by their introduction. For such clients, the postponement of the reforms until 6 April 2021 is unlikely to make a significant difference, save that the immediate legal impetus for imposing such changes has now temporarily fallen away. This may lead some individuals, who have already been affected by the changes, to ask their clients for a reprieve until next year, which may need to be considered on a case-by-case basis.

For other companies who were still in the throes of tackling the complexities and labour–intensive IR35 changes, a further year to prepare will be welcome news—particularly as companies and individuals alike deal with the fallout of COVID-19.

It remains to be seen, once the costs of COVID-19 have been counted in due course, whether the reforms will indeed be introduced in a year’s time, as now planned.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Matthew Howse
Louise Skinner