The Government has announced that it is delaying the implementation of IR35 tax reforms, previously due to take effect from 6 April 2020, until April 2021, as part of the package of measures introduced to relieve the strain on the economy during the escalating COVID-19 pandemic.

What is IR35 and what are the proposed changes?

The purpose of the IR35 legislation is to ensure that workers providing services through an intermediary, such as a personal service company (“PSC”), but working like employees, pay broadly the same employment taxes as employees.

Currently, in the private sector, the PSC is liable to assess whether the payments received for the worker's services are caught by the IR35 rules and account for any tax and national insurance contributions (“NICs”) due. The reforms which were due to commence from 6 April 2020 shifted the burden for compliance to the end user business (save in the case of small businesses) so that the end user business would become responsible for deciding whether or not an engagement falls within IR35 by making a status determination assessment. The end-user business (or where there is a supply chain, the business contracting with the PSC) would also become responsible for deducting, and accounting for, income tax via PAYE and NICs.

These proposals have significant implications for end-user businesses, including:

• a substantial additional administrative burden on businesses that engage individual contractors via PSCs, including making a status determination and dealing with any appeals;
• increased business costs in the form of employer’s NICs in relation to those individual contractors who are determined to be employees for tax purposes; and
  higher rates of pay sought by contractors to mitigate the increased tax burden they face.

What does this mean for businesses?

The Government has made it clear that this is merely a delay and not a cancellation of the IR35 reforms, so any preparatory work already undertaken by businesses is not wasted.

However, in the light of this announcement, the current position will now continue until April 2021. PSCs may continue to assess whether payments received for the individual's services are caught by the IR35 rules and account for any applicable income tax and NICs.

Businesses can therefore temporarily down tools on measures to implement the changes required under the new IR35 regime. Where new contracts have already been entered into in anticipation of the new regime, businesses and contractors may wish to re-open negotiations to seek agreement to revert for another year to the previous terms, which may be more beneficial to both parties. Please do get in touch with the writers or your usual Stephenson Harwood contact if you require advice.

The news of this delay will be welcomed by businesses and individual contractors currently trying to navigate the as yet unclear, but undoubtedly very serious, economic implications of the current COVID-19 pandemic. However, the delay may come too late for workers who have already seen their contracts terminated and businesses which have implemented new working practices to deal with the proposed changes. In particular, it remains to be seen whether the trend for businesses ceasing to engage with workers through PSCs in preparation for the change in the IR35 regime will continue or whether there will now be a short-term resurgence in engagements through PSCs pending the delayed reforms.