18 Mar 2020

Government to delay IR35 tax reform for contractors

Government to delay IR35 tax reform for contractors

The UK Government has postponed the introduction of a controversial tax reform that would have had major implications for contractors.

Responding to the Coronavirus outbreak, Steve Barclay, chief secretary to the Treasury, told parliament last night that he was deferring the changes for a year to help businesses and individuals left struggling by the Covid-19 outbreak.

The rules, called IR35 and first implemented in 2000, aim to stop employees holding themselves out themselves as freelance contractors in order to pay less tax.

To improve compliance, the government in 2017 made public sector organisations responsible for determining employment status. That same responsibility was to be extended to every medium and large private sector business in the UK from early next month.


However, that will now not take place until April 6, 2021.

Speaking in the House of Commons, Mr Barclay said: “The government is postponing the reforms to the off payroll working rules, IR35, from April 2020 to April 6, 2021.

“This is a deferral in response to the ongoing spread of Covid-19 to help businesses and individuals.

“This is not a cancellation and the government remains committed to reintroducing this policy to ensure people working like employees but through their own limited company pay broadly the same tax as those employed directly.”

IR35 explained

As a rule, if you’re a standard, salaried, employed individual, then actually the tax system is probably fairly straight forward. In general, you’re taxed at source and your employer takes care of it.

However, in recent years, there has been a marked increase in individuals leaving salaried employment and becoming a contractor, providing services through their own company.

This has been particularly prominent within the financial services sector and the oil and gas industry but it has been a common feature of the construction industry for many years.

Karen Harvie, a Senior Associate in Aberdein Considine’s Employment Law Team, explained: “In a nutshell, the individual is doing the same job, and the company is receiving the same service, but it is no longer an employee/employer relationship. It has now become a supplier/client relationship.

“And there are indeed benefits for both. For the company receiving the service, they no longer have the normal employee obligations, such as paying employer NI contributions and ensuring employment law rights. For the provider, they can pay themselves a salary and they can also draw dividends, meaning they pay less tax and NI than they would as employees.

“Businesses will be familiar with IR35, first introduced in April 2000. This was the government’s first attempt at introducing measures to counter tax avoidance by the provision of personal services through an intermediary company, or personal services company (PSC).

“Ultimately, to be caught by IR35 meant that the individual supplying the service was considered by HMRC not to be a genuine self-employed contractor, but a disguised employee, the consequence of which was that they should be deemed subject to income tax and NIC as though they were an employee. Critically, the responsibility for making that determination and paying the tax fell on the PSC.

“However, HMRC has now recognised that there has been significant non-compliance by PSCs with IR35, and it is now introducing reforms to deal with this.

“The reforms, which are being introduced, now in April 2021 following last night’s announcement, will have the effect of transferring responsibility for determining whether an individual is a disguised employee from the PSC to the client end-user, where the client will decide whether the individual is caught by the rules.

“The client will become responsible for deducting and accounting for income tax and NI via payroll. If they fail to do so, the consequences can be serious and expensive, with interest and penalties applying.”

Employment law advice

Employment law is a rapidly evolving and often complex area of the law. Specialist advice is therefore essential.

Our solicitors support businesses of all s on all areas of employment law from our offices in Aberdeen, Edinburgh, Glasgow, Perth, Newcastle and Stirling.

If you would like to speak to one of our employment lawyers about your business, click here.

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