Out-Law News | 21 Jul 2020 | 11:19 am | 2 min. read
The substance of the UK government’s response to the House of Lords Economic Affairs Finance Bill Sub-Committee report into IR35 is "unsurprising" and the government’s insistence that the reforms will be introduced in their current form in April 2021 "was predictable, a tax expert has said.
Penny Simmons of Pinsent Masons, the law firm behind Out-Law, was commenting on the government's response to a House Of Lords' report on the off-payroll working rules IR35. The response confirms that the changes to the IR35 rules will go ahead in April 2021.
The Lords' report was very critical of the reforms and recommended that, to give certainty to business, the government should announce by October whether it will implement the rules in April 2021, or whether any ongoing impact to the economy resulting from the Covid-19 pandemic will require their implementation to be delayed further.
The IR35 rules require that employment taxes be paid by people who provide services through 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.
The rules are due to change from 6 April 2021. From this date, engaging businesses will be made liable for determining whether the IR35 rules apply. They will also be required to operate PAYE and pay employers' National Insurance Contributions. The changes will not apply to small businesses which engage contractors through PSCs.
The changes were originally due to take effect this April, but the start date was delayed a year as a result of the coronavirus pandemic.
"There is no change to the government’s view that they cannot delay addressing the unfairness in contractors paying less tax than employees when they are doing the same work and therefore will press ahead with the reforms. There are a few nuggets in the response document that are interesting, particularly that despite the delay to implementation, the government is still committed to adopting a light touch to compliance penalties in the first 12 months after the reforms are introduced." Simmons said
Under the new rules, businesses will be required to provide a statement determining the employment tax status of contractors working through PSCs directly to the contractor, including reasons for the determination. Businesses may use HM Revenue & Custom's (HMRC) Check Employment Status for Tax (CEST) tool to establish whether a contractor would be considered to be an employee for tax purposes. Contractors will have the right to disagree with the determination through a new business-led status disagreement process.
"The government's response also puts beyond doubt the view that a decision by a business not to engage with any PSCs does not amount to a blanket employment status determination that is not allowed under the reforms – 'organisations are free to decide how to structure their workforces and how to engage workers.' The government’s insistence that its CEST tool is fit for purpose and that it thinks it is sufficient that the CEST tool only provides a determination in approximately 80% of cases is also unsurprising," she said.
"It will be interesting to see whether anything new comes out of HMRC's commitment to consider whether there is any additional support that can be offered to ensure organisations approach status assessments correctly and its pledge to continue to engage with businesses and individuals prior to April 2021," Simmons said.