IR35 delayed until April 2021 – what does this mean for the private and public sectors and what are the next steps?

IR35 delayed until April 2021 – what does this mean for the private and public sectors and what are the next steps?

Thu 19 Mar 2020

Tuesday 17 March was a busy and momentous day for the Government. From the growing threat Covid-19 is bringing to the UK and Europe as a whole, to the £330bn financial support announcement for businesses and individuals, it was a day of emotion and bold, unprecedented action.

The action however did not stop there. Many businesses in the private sector have been finalising their preparations for managing compliance with the new “IR35” Off Payroll Working regulations that were due to go live from 6 April 2020.

However, in the final minutes of parliamentary meetings on 17 March, the Chief Secretary to the Treasury, Steven Barclay, announced there would be a postponement to the introduction of the changes until 6 April 2021. This followed hot on the heels of a debate in the House of Lords on 16 March that called for a postponement. They got their wish!

This has been announced solely due to the pandemic and the need for the Government to focus all energies on keeping the UK going during this challenging time where health is of paramount importance.

Following on from this, HMRC has commented:

“The reform to the off-payroll working rules that would have applied for people contracting their services to large or medium-sized organisations outside the public sector will be delayed for one year from 6 April 2020 until 6 April 2021. This is part of additional support for businesses and individuals to deal with the economic impacts of Covid-19. This means that the different rules that exist for inside and outside the public sector will continue to apply until 6 April 2021.

This announcement is a deferral of the introduction of the reforms, not a cancellation. The Government remains committed to introducing this policy to ensure that people working like employees, but through their own limited company, pay broadly the same tax as individuals who are employed directly.”

What does this mean?

By delaying the introduction of IR35 until April 2021, it means private sector businesses of all sizes, for the 2020-21 tax year do not need to:

  1. Identify engagements with qualifying Personal Service Intermediaries (typically Personal Service Companies (PSCs) or LLPs; or
  2. Assess the employment status of those engaged via PSCs and provide them with a Status Determination Statement (SDS) to confirm whether they are considered “on payroll” or “off payroll” for the purposes of payments made in respect of that specific engagement.

They will however need to assess the status of those engagements that are due to complete and receive payment post 5 April 2021, providing an SDS where they are being considered as being engaged “off payroll”.

The requirement to assess employment status and operate “IR35” deductions remains the responsibility of the PSC for 2020-21. Therefore, HMRC will seek any underpaid income tax/NIC from the PSC, where it is considered that the relationship is one of employment.

This change only impacted private sector businesses that were considered medium or large. This was defined as businesses that met two out of the following three criteria:

  1. Turnover of more than £10.2m;
  2. A balance sheet total (assets) of more than £5.1m; and
  3. An average of more than 50 employees.

As above, it is clear this is not a cancellation. Businesses still need to prepare for the changes albeit they now have more time given the ongoing global health emergency.

Payroll practicalities

For organisations who were engaging PSCs on an “IR35” basis, systems were being put in place to deduct the necessary income tax and NIC through payroll. This was well documented with many banks and well-known companies taking steps by making blanket decisions that certain roles were within IR35.

However, this is now not required and is not the responsibility of the fee payer to do. Therefore, payments will need to be made gross for the PSC to deduct income tax and NIC as appropriate where it is deemed by the PSC for the relationship to be one of employment.

This may cause some issues and we are helping clients re-assess the decisions they have previously made to ensure they remain compliant, practical and effective during this challenging period.

What needs further consideration?

Alongside the above, organisations will have already introduced wide scale changes to the working relationship of those who have been engaged off payroll. 

Key changes that were being made may need to be revisited, particularly where umbrella companies were being used to effectively hive down who picks up the PAYE/NIC liability and where blanket decisions (not assessments) had been made to put certain roles as within “IR35” to manage risk prudently.

These may be difficult to unravel given the work that gone into reviewing arrangements over the past 12 months.

However, this may be necessary, given it is not the end client / fee payers responsibility to decide on the tax/NIC treatment of payments PSCs receive and that there is now a greater need to mobilise services quickly, manage costs and keep the economy moving.

Furthermore, where roles were considered to be within IR35, it will be important to consider the employment law position if it was being intended to deduct tax/NIC through payroll but not give the individuals access to pension, holiday, etc.

Having flexible off payroll services to call upon may be the difference between a company managing the current global crisis and not being able to manage in the crisis.

The Public Sector will need to consider whether it does consistently provide an SDS to contractors given that the legislation which requires this is now being delayed.

Finally, HMRC needs to update their Employment Status Manual to refer to the date being delayed!

What is not changing

  • The Off Payroll Working rules are still very much in place for the public sector. This means there is still a requirement for the public sector to identify and assess those engaged via PSCs. To enhance the compliance in place, it is recommended that the public sector produce SDSs and provide them to the contractors, albeit that this specific change to the public sector legislation is not changing until April 2021.
  • The rules will be introduced for the private sector in April 2020-21 – it is just a delay, not a cancellation
  • Private and public sector organisations of all sizes still have an obligation and a risk to manage in assessing the employment status of those engaged directly as individuals. It is important to be fully aware of who has been engaged to provide services by reviewing Companies House, having contracts in place and making payments into Company rather than personal bank accounts. It is recommended that SDSs are produced in these instances to help demonstrate the compliance and manage the risk effectively.
  • HMRC is winning more cases, as we have seen recently with Eamonn Holmes and this risk is not going to go away, and will remain a risk for the end user where HMRC can challenge that individuals have been engaged directly (e.g. the contract refers to an individual rather than a company, payment is made to an individual, not a company bank account or the company is not registered at Companies House).
  • Payments made to office holders (regardless of whether engaged via a PSC or not) for office holder duties need to be processed through payroll – where they have not been there is a historic risk of PAYE/NIC being due which will be the responsibility of the payer / end client.
  • How employment status is fundamentally assessed remains exactly as it was. However, the responsibility for undertaking the assessment in the private sector now reverts back to the PSC rather than the end client (until 6 April 2021). This is also the case if HMRC challenge the relationship.
  • Therefore, it is still recommended good practice to undertake an SDS assessment, produce and provide SDSs and keep this on file, getting appropriate advice to demonstrate reasonable care. End Clients may wish to support on this given broader reputational risks, as well as a need to ensure the Corporate Criminal Offence legislation is adhered to (i.e. controls in place to demonstrate not facilitating tax evasion within the supply chain)

What are the next steps?

There is now time to properly prepare for the IR35 changes that will go live from 6 April 2021. We recommend the following steps are taken in the next 8-10 months to be a comfortable and confident position that effective compliance procedures are in place:

  • Review supplier lists, identifying if engagements are with PSCs, individuals or other companies/intermediaries (e.g. agencies)
  • Consider if an employment status assessment needs to be performed and SDS produced
  • Put appropriate contracts and service agreements in place
  • Agree SDS approach for both contractors engaged directly as individuals and via PSCs
  • To establish a consistent process, provide SDSs to both individuals engaged directly and PSCs. This will demonstrate a clear control is in place and help manage the risk of HMRC challenge for those engaged directly, given that the risks exist regardless of the IR35 delay
  • Ensure key stakeholders have been identified and clear governance documentation is in place to set out the controls and responsibilities. This helps show HMRC that the organisation takes the risk seriously and is showing reasonable care, reducing the risk of a successful HMRC challenge.

How Mazars can help

At Mazars, we have developed a compelling and successful approach that combines our technology to ensure a consistent and considered approach is taken and our specialist expertise to help identify and determine accurately. This has been designed with our clients in mind to help smoothly navigate the new rules in a considered and effective manner.

mIR3S is our technology tool that helps put controls in place for the two mandatory requirements required to police IR35:

  1. Identifying whether the engagement need to be considered for assessment under the new off payroll working rules– this is achieved through an analysis of the supplier list / purchase ledger to assess whether you have engaged with any organisations / individuals that could be caught by these new rules; and
  2. If yes, assess and produce a Status Determination Statement to confirm the decision made, indicating whether payments can be made off payroll or if they need to be processed on payroll with PAYE and NIC deducted.

mIR3S takes the strain and complexity out of the mountain of legislation and guidance issued by the Government. It enables Mazars to give bespoke, practical and considered support to organisations across all sectors and of all sizes.

Where can I find out more?

To find out more, watch our short video that demonstrates the value we can add to enhance your approach to IR35 and Off payroll working compliance.

What next? – Free initial mIR3S consultation

As it is currently an extraordinary and uncertain time in society, and this remains a key risk to manage, our specialist team are very happy to have a free 30 minute telephone call to help you and see how our mIR3S approach can enhance your compliance approach.

Please do get in touch with your normal Mazars contact or the any of the following specialists: