26 January, 2021
Following a 12-month postponement due to the impacts of Covid-19, the Finance Act 2020 received Royal Assent on 22 July 2020, meaning that the forthcoming reforms to the IR35 tax legislation for the private sector are now just a matter of months away.
IR35 was first introduced in 2000 with the aim to reduce tax avoidance, and reforms were made in April 2017 to shift the responsibility for carrying out tax assessments from a contractor, to the public sector client. The latest IR35 changes will see the same shift of responsibility to many medium and large sized private sector organisations to ensure that those individuals who work as if they are employees (often known as personal service companies) pay the same tax as employees, irrespective of their working structure. The reforms will apply to any payments made on or after 6 April 2021, unless all of the contractor's labour and services were provided before that date.
Traditionally, private sector organisations have been able to engage contractors using personal services companies (or other intermediaries) without having to consider the contractor's status for tax purposes. However, this will be changing imminently, and many private sector organisations will be required to determine a contractor's employment status for tax purposes and, if appropriate, operate PAYE tax, National Insurance contributions and any apprenticeship levy.
The new rules will apply to large and medium organisations and their subsidiaries that meet 2 or more of the following conditions:
Though, the new rules will not apply to contractors who supply their labour directly without using an intermediary, for example as a sole trader, or those who are not tax resident in the UK and who supply their services exclusively outside of the UK.
Whilst the postponement of implementing the reforms in 2020 was welcome and provided relief for businesses having to contend with the challenges that Covid brought, businesses will now need to review how they engage with contractors in advance of April 2021 to ensure that they are ready for the changes and avoid being subjected to financial penalties in the event of being found to have breached IR35. End users are advised to review their contracts and working arrangements with personal service companies and other intermediaries to ensure that the IR35 reforms are reflected, for example by ensuring that the terms do not contradict the determined status of the intermediary.
If you have any queries in respect of the forthcoming changes or require assistance with reviewing current contracts and drafting new bespoke agreements for IR35 compliance, contact John Pickervance, Partner and Head of Commercial.