IR35 – HMRC warns employers to be prepared for changes notwithstanding Covid challenges

The Revenue is encouraging businesses to prepare for the changes to the off-payroll working rules coming into effect in April next year notwithstanding the challenges they are facing due to Covid-19. That is according to an information note published by HMRC on Monday and seen by our tax lawyers. A reminder – the IR35 rules require that employment taxes be paid by people who provide services to a business through an intermediary, usually a personal service company (PSC), if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies, and to pay any employment taxes, rests with the PSC. Final technical guidance on the changes was published on Monday last week. That guidance has been updated to reflect the final legislation included in the Finance Act 2020 and provide more examples and clearer explanations of how the rules should be applied. Tax specialist Penny Simmons has been commenting on this for Outlaw. Her message to employers is notwithstanding the challenges that businesses are currently facing, don’t delay preparing for the rules. She also says don’t over rely on previous comments from the Revenue that it is committed to a light touch to non-compliance penalties in the first 12 months. Interesting. What does she mean by that? I phoned Penny to find out:

Penny Simmons: “What I'm saying is that previously, and when I say previously I'm specifically talking about the government's response to the House of Lords committee's report into IR35. Now that report was published in the summer and then the government published their response to it. Now in the government's response to that report, they made a comment that there would be a light touch to non-compliance penalties in the first 12 months of the new rules coming in force, so from April 2021 to April 2022 and that was, if you like, reassuring because you wouldn't have expected a light touch to compliance given the lead in time that businesses have now had given the latest delays – the lead in time that they've had to the new rules being introduced. However, when I'm saying don't be overly reliant that there will actually be a light touch to non-compliance penalties, I'm saying that in the light of the fact that we are in an incredibly fast moving, fast changing world at the moment. We know that the rules in relation to the pandemic keep changing, and the Chancellor has to constantly re-think  and re-look at how to bring money in from the Treasury's perspective. So it's fast moving from that perspective, but not only that, we've seen the Revenue, almost overnight, change its position in relation to VAT rules. So what the Revenue says one day isn't necessarily the case, the next. So what I'm saying is, a business shouldn't turn around and say well, you know, back in the summer it was stated that there would be a light touch to non-compliance penalties in the first 12 months so really, we can say to ourselves, we don't need to get too worried about IR35 until April 2022. What I'm saying is, actually, sort out your procedures,  make sure you have identified your full population of personal service contractors, be that those that you engage with directly, those that you engage with through an agency, and also those that may be caught by the rules because they are part of an outsourcing agreement that you may think is fully outsourced, and therefore outside the rules, but actually isn't fully outsourced. So collate that information and once you've got that information, make the status determinations that you need to make to determine whether PSC contractors fall inside or outside of IR35 and therefore whether your business will be liable to tax under the new rules from April 2021 and don't take the view that actually you don't need to deal with this properly until April 2022 because you are seemingly under the idea that there will be a light touch to non-compliance penalties. The Revenue may take the view that if you've missed one or two contractors, they'll take a light touch to penalties, but I don't think they'll take the view that if you've just ignored it completely on the basis that you had too much else going on because of the Covid-19 pandemic, that there won't be penalties. I think the very fact that the Revenue are publishing these information notices and expressing the view that they know businesses are facing significant challenges at the moment, but irrespective of those challenges, the changes to IR35 are coming into force, and they expect businesses to prepare fully for those changes and in the Revenue's view they are offering support to businesses and contractors alike. They have published information about a series of webinars that they're launching from mid-October to help businesses prepare. So from the Revenue's perspective, they are doing everything they can to help businesses but these rules are coming into force in April and businesses need to prepare for them.”