If your business deals with contracting and sub-contracting, then you might well have been preparing for the expected changes to IR35. But, with the unprecedented economic impact of coronavirus, it has been announced that IR35 will be delayed by a year.
Why has IR35 been delayed for the private sector?
The UK government has recognised that enforcing its IR35 crackdown for private sector firms at a time of so much uncertainty would be unfair. Every business owner is already facing a long and urgent list of tasks related to COVID-19, which must be prioritised to avoid losing vital cash flow.
Plenty of businesses are massively impacted by the global pandemic, having to contend with a lack of workers, site shutdowns and a marked drop in sales due to a lack of consumer confidence.
What is IR35?
IR35 was created back in 1999 to clamp down on one-man-band limited companies who were providing professional services to clients but essentially working for them as a traditional employee. Being classed as a Limited Company however, they were enjoying tax benefits.
IR35 became law in 2000, with some backlash from representative groups of contractors and freelancers who claimed the legislation was too vague to give them certainty over their IR35 status.
In 2016 the government set ahead with a clampdown on ‘off-payroll working’ within the public sector. It made public sector clients responsible for determining whether or not their workers fall under IR35 rules.
The reforms that were due to be rolled out in April 2020 would apply similar rules to private sector. Medium and large businesses would become responsible for setting the tax status of contracted workers they liaise with.
The IR35 reforms were expected to bring in an additional £3.1bn in tax revenues between 2020 and 2024. Although it does seem fair and balanced, many have expressed concerns that it is freelancers who will be hardest hit. Some are worried that the increased associated expenses will lead to businesses choosing not to work with them.
How does COVID-19 affect IR35?
The British Chamber of Commerce has recently announced that it expects the UK economy to slow to a growth rate of just 0.8% due to the impact of the COVID-19 outbreak.
Prior to the pandemic, growth was predicted to be around 1%. The recent changes indicate the weakest growth outturn since 1992. There is no doubt with figures like this that businesses may start to struggle in 2020.
It has already been widely reported that the impact of Coronavirus, even this early on, has led to many companies laying off staff. HSBC has announced it will cut 35,000 jobs worldwide in response to the downturn.
There has also been considerable focus on the impact all this has on self-employed workers who don’t have an employer to pay them sick pay. The self-employed may not receive any sick pay benefits and may instead have to depend on other benefits, or their savings.
Freelancers and the self-employed already have a significant amount of financial stress to contend with in 2020. Many have been vocal in explaining the fact they are often considered the first line of cuts when businesses must make savings.
That said, many in this industry have already put into place proactive plans to make their business legitimate under the new rules. Some businesses have sought to take on contract workers as full time employees.
Other freelance and contract workers have sought to be managed underneath an umbrella company who pays them as an employee, contracting them out to other businesses. This satisfies the taxation reforms.
In conclusion, we only need to read the stats to understand why adding extra financial pressure to businesses in the form of IR35 reforms at this difficult time is highly ill-advised.
Steve Barclay, the Chief Secretary to the Treasury has confirmed that the IR35 reforms will commence in April 2021.
He further commented that he wanted to reiterate the reforms were delayed, not cancelled, and businesses should continue to make adequate preparations.
However, regardless of these comments, some have expressed hope in a delay, with the House of Lords expected to deliver a review of the legislation. Several major campaigns have lobbied against the reforms, which may be taken into consideration.
How can your business prepare for the IR35 reforms?