IR35 update: where are we now?

After many months of consultation on IR35 and uncertainty, the conclusion of this review brings some clarity - albeit many would argue this is late in the day with the commencement taking place on 6 April 2020.

The review reiterates that IR35 reform for the private sector will come in as intended, which puts an end to questions over whether we could see a further delay at the Budget (11 March 2020).

The review notes that HMRC guidance will be updated to reflect the changes proposed, this will follow the previous updated draft guidance which was released on 7 February. However, we understand that final legislation will not be published until the wider Finance Bill is released on 19 March.

Recap: What are the IR35 rules?

The IR35 rules apply where an individual (the worker) provides their services through an intermediary (often referred to as a Personal Service Company) to another person or entity (the client).

The rules are intended to ensure that individuals who work like employees, broadly pay the same Income Tax and National Insurance Contributions (NICs) as employees, regardless of the structure they work through.

The rules have been in place since 2000, but HMRC are concerned that non-compliance is widespread. As a result, the government announced at Budget 2018 that to increase compliance with the existing IR35 rules in the private sector, medium and large businesses will become responsible for ensuring their contractors pay the right Income Tax and NICs (this follows similar reform in the public sector in 2017).

What do the conclusions of the review mean for business?

The CBI has been clear with government since this reform was announced that it is right that the government is looking to address non-compliance, which leads to a loss in revenue which funds vital public services but it is essential that this is met with certainty and simplicity for businesses alike.

Due to the delays in publishing draft guidance and final legislation (which won’t be published until 19 March – 12 working days before commencement of the reform), certainty and simplicity for businesses and contractors alike has not been achieved.

However, the outcome of this review shows that HMRC have listened to business, with the focus on communication and education welcome and something the CBI has been calling for to ensure all parties are aware of the facts surrounding the law rather than misconceptions and the risks to contractors of using tax avoidance schemes - for many though this would have been welcomed months earlier.

This review also addresses several other points the CBI have been calling for over how HMRC intends to operate the reform in practice including simplification of the commencement criteria for the reform which, by referring to services provided from 6 April 2020, provides greater certainty (and in many cases a little more time) over when to operationalise the reform from. Also, defined time limits for contractors to dispute clients’ determinations removes the risk for business of the possibility of open-ended timeframes for disputes.

What comes next?

If you have comments on the conclusions of the review, please get in touch.

The CBI will continue to engage with HMRC on the draft guidance and the final legislation once published (on 19 March) over those areas where further clarity is required.

HMRC have also committed to commission external research into the impacts of the reform six months after implementation. This will be an important point to test whether this policy is having the desired effect, and it is vital that this includes a full and comprehensive impact assessment which properly assess the admin burden for business and the impact on labour market flexibility. This policy cannot be the end of the road. There have been too many sticking plasters over the years and a holistic review of the employment tax system needs to be undertaken at the earliest point practical. This should consider the interaction with the government’s Good Work programme.