At any other time, the decision to postpone IR35 in the private sector would have been headline news.
But amid the disruption felt by people and businesses across the country as a result of COVID-19, this announcement, made on 18 March, has gone largely unnoticed.
The change to the off-payroll working rules was set to take place in the private sector this April, meaning businesses would be responsible for determining the employment status of their contractors for the purposes of tax.
Among other measures to lessen the strain on businesses and individuals during this difficult time, the Government announced that the change will be put on hold for 12 months.
Stephen Barclay, Chief secretary to the Treasury, emphasised that this is “a deferral not a cancellation”, and that the Government is still committed to rolling the changes out next year.
IR35 background
In 2000, legislation was put in place to prevent what the Government considered to be ‘disguised employment’.
This is where individuals work in much the same way as if they were employed, but are self-employed for the purposes of tax, meaning they and their client have fewer tax obligations.
Previously, it was up to the person providing the service to determine their employment status for the purposes of tax in line with IR35 rules.
This was changed for public sector contracts in 2017, and it became the responsibility of the organisation receiving the services.
In 2018, it was announced that the same reform would extend to the private sector from April 2020 onwards.
Following the decision to postpone it, the extension will now take place from 6 April 2021.
Therefore, it is currently still the responsibility of the person providing the service to determine their IR35 status.
It is recommended that businesses review their status and keep documentation to show the reasons they are deeming themselves outside the scope of IR35.
Who will be affected?
IR35 could apply to anyone who provides their services through an intermediary, such as a limited company.
Medium and large businesses that use contractors will need to review all contracts that are put in place from 6 April 2021 onwards, and assess where they sit in terms of employment status.
For small businesses, an exemption applies that means they won’t be included in the reform, and will see no change in the way they work with contractors.
What are the IR35 tests?
The difference between being self-employed or employed for tax purposes isn’t straightforward, and has to be decided on a case-by-case basis.
There are a number of legal ‘tests’ that can be applied to someone’s working situation to find this out.
In general, the point of these is to work out whether a person would effectively be employed or not, if they were not working through an intermediary.
Three of the most important tests are:
- Mutuality of obligation, which asks whether a business is obliged to provide work and the worker obliged to accept it.
- Control and direction, which looks at the amount of control someone has over the work they do and how they do it.
- Substitution, which asks whether the worker has the option to send someone else to carry out the work in their place.
If, for example, you’re carrying out a standalone project for a client and have no guarantee of further work at the end of it, and you can choose how and when you do the work, you might fall outside of IR35 legislation. This would allow you to continue working as a genuine business.
But if you’re required to come into your client’s office at regular hours, are instructed on how to do the work and supervised throughout, and if you do not have the option to send someone else in your place, you might be caught within IR35 and treated as an employee for tax purposes.
There are several other tests, however, and it’s important to get a professional opinion on your overall working situation.
Get in touch
At Knight & Co, we can support you with a range of personal tax and finance services, and help you to prepare for the off-payroll changes next year.
Contact us for an initial, free consultation, to talk about how IR35 might affect you.