The government has confirmed it will proceed with an important, albeit technical, correction to the IR35 legislation which had been flagged up by practitioners some time ago, and acknowledged as a mistake the Revenue. A change to the off-payroll working rules will be made in the next Finance Bill to ensure the legislation will operate as intended from 6 April 2021 for engagements where an intermediary is a company. The change was announced last week by Jess Norman MP in a tax policy update and will correct an unintended widening of the definition of an intermediary. It applies to the situation where workers provide services to a third party through a range of intermediary companies and the worker is already subject to PAYE. The announcement carries the important message to all employers in the private sector that off-payroll working rules will apply as intended from 6 April 2021 and businesses should continue to prepare on that basis. That’s interesting because there has been t speculation recently that the rules might be delayed again, or even abandoned altogether given the pressures already facing businesses because of the pandemic. So, for example, the construction sector’s Building magazine was hopeful that the government was providing a glimmer of hope in that direction. That glimmer was based on the comments made by HS2 minister Andrew Stephenson an AGM for trade body Build UK. He is reported to have said that the government was keen to “reflect” on the changes. More recently, the FT picked up on comments made by Conservative MP Mel Stride at the end of October at a Treasury Committee he was chairing. He had called for the abolition of what he described as the 'dreaded' IR35 rule. We will come back to that issue shortly but first the correction made to the legislation, and the background to that important change. To explain, tax specialist Penny Simmons who joined me by video-link from her home in London:
Penny Simmons: “The IR35 rules, if you just rewind, what are they doing? Very, very simply, all they're saying is if you have a business that engages with a contractor, and that contractor engages, broadly speaking, through a limited company, then essentially all the rules are doing is ignore the limited company and say, if that contracts are had engaged with the business directly, would that contract or have been an employee for tax purposes? If that contractor would have been, then you impose a an employment tax charge and National Insurance Contributions, that's all IR35 is doing. Now, what we've seen in the legislation is that limited company that I've just talked about that that contractor engages with the business through, that limited company is defined as an intermediary in the legislation and what happened when the legislation was being drafted was that that definition of intermediary was broadened by HMT when they were drafting the legislation, and it was broadened to prevent potential avoidance of the rules, but what they did in broadening that definition was they created a scenario - and they didn't intend for this to happen - but they created a scenario where the definition of an intermediary was so wide that it would have caught entity such as umbrella companies. So if you had an arrangement where a business engaged contractors through an umbrella company, and all those contractors were employees of the umbrella company, and the umbrella company, if you like, was the employer of those contractors, and operating PAYE and paying employer’s National Insurance Contributions, then, even though IR35 shouldn't apply, the way the legislation was drafted Following the changes that were made in the spring, was that actually that umbrella company would have been an intermediary under the new rules, and therefore IR35 would have applied, so irrelevant that the umbrella company would have already paid PAYE, the business engaging those contractors through the umbrella would then also have to operate PAYE as well if the contractors fell within the scope of IR35. Now, that was obviously totally unintended, not wanted by the Revenue at all, there was no intention for there to be double taxation of that kind. So what we saw was a situation whereby the Revenue actually held their hands up very, very quickly and said, we can see there's a problem, we can see that we've made this tweak in order to prevent avoidance, but by making this tweak the legislation we're actually going to have unintended consequences so we are going to hold our hands up and we're going to resolve the problem. And that's what we’ve seen.”
Joe Glavina: “There has been some speculation in the press recently around the possibility of the legislation being delayed again, for a year, or even two years until 2023, or perhaps even being abandoned completely. I know you are close to all of this Penny, so what's your take on that?
Penny Simmons: “Okay, so first and foremost, my view is that the IR35 rules are coming in in April 2021 come what may. They are coming in and businesses need to prepare for those rules because there won't be, in my opinion, any further delay. And why do I say that? I say that because first and foremost, we've had a delay, we've had a delay for COVID, we've had a 12 month delay, and that delay was announced back in March last year when lots and lots of businesses had already spent a huge amount of time and money preparing for the rules. So in some respects, they actually weren't happy that there was a delay because they'd already spent the time and money preparing. So we've had we've already had a delay. But what we've also seen now, and I think we've seen that in the way that the Revenue and HM Treasury have responded to amend the legislation, and they're amending the legislation through the Finance Bill 2021, but the way that they’ve responded and acknowledged that there's been a mistake in the drafting, and that they're going to amend the legislation, for me is as much of a sign as you're ever going to get that the legislation isn't going anywhere. In fact, it's already law - it was in Finance Act 2020 - and there won't be a further delay. The rules will come in in April, as intended and, in fact, that's exactly the message that the Revenue are putting out there. They said, we see that there's a problem. We are going to amend that problem and we're going to solve it through the Finance Bill 2021. Not only have they done that, but they've updated their guidance to say we know that there's a problem and we are sorting it, but by engaging with stakeholders, and engaging with businesses, in this way they are saying look, we know that there's a problem, but at the same time these are the rules, this is going to be the law from April, don't ignore, don't delay, make sure that you are ready because the changes are coming in, come what may, in April.”
IR35 is a subject Penny has written about in some detail in a number of articles which you can find on the Outlaw website. The one about HMRC's warning to be prepared for the changes notwithstanding Covid is worth flagging for you. The message there is to ignore the Revenue's previous promises of a light touch approach towards enforcement of the legislation. That was many months ago when employers could reasonably argue they hadn't had much time to prepare. Well a lot of time has passed since then, that promise has fallen away, and the Revenue is now saying you've had plenty of time to get ready for this, more than a year, so no excuses this time round.