In light of the ongoing COVID-19 pandemic, the UK government announced in March that the extension of off-payroll working (IR35) reforms to the private sector would be postponed for a year. This measure is to help individuals and businesses through this difficult and uncertain time. The reforms will now come into force on 6 April 2021.
While private sector employers have a temporary reprieve from the new regime, there are a number of steps that should be taken over the next 10 months, to ensure they are ready for implementation.
Correspondence from the House of Lords
The House of Lords wrote to the Treasury on 26 March 2020, welcoming the postponement of IR35, but restating issues that had previously been raised ahead of the original implementation date, prior to the pandemic. The letter requested that Treasury defer the IR35 reforms until it resolves the questions put forward.
The main concerns identified include:
- the "significant" cost to businesses in preparing for the off-payroll reforms;
- whether the implementation of off-payroll working in the public sector has proved successful;
- the potential for contractors to face reduced business;
- potential issues around blanket assessments leading to a loss of key workers;
- the role of umbrella companies and how their compliance with the reforms will be regulated;
- the reliability of the CEST (Check Employment Status for Tax) tool which omits key information used to determine employment status;
- whether the reforms will support the growth of the gig economy; and
- the fairness of the changes on those individuals who are treated as employees for tax purposes but will not benefit from other employment rights.
Lord Forsyth, who drafted the letter, requested a response within 10 working days. At the time of preparing this article, a response has not yet been received, although we will share any updates on this on our blog, which can be found here.
What should employers be doing?
At present, it appears the changes will come into effect in April 2021, as recently confirmed. While this might seem a long way off, employers should now be making preparations to ensure they are organised when the time comes.
In short, the IR35 reforms are committed to maintaining that employers are liable for ensuring that contractors working through limited companies pay the right levels of tax and National Insurance contributions. The intention is for the rules to apply to any individual who (but for the supply of their services through a company or agency) would otherwise be an employee for tax purposes. This puts an onus on businesses to establish the employment status of contractors. Assessing contractor arrangements and employment status early on will ensure that employers have ample time to collate requisite information and/or make necessary changes in the workplace ahead of the implementation date without increasing the burden on contractors and businesses when we emerge from the COVID-19 pandemic.
Key things employers can now be doing to prepare for next April include:
- Understand your obligations
Now is the time for employers to get to grips with their obligations under the new rules and how to implement the changes. It is also a good time to get a plan of action in place to simplify the process of determining worker status.
- Understand your workforce
Assessing the make-up of a workforce, in which contractors will fall within the remit of IR35, will be key. A good starting point would be to see which, and how many, contractors are engaged through personal service companies and agencies. It is important that this exercise be carried out for any contracts that are due to start shortly before, or extend beyond, April 2021.
- Check terms of engagement
Ensure that terms of engagement with contractors and consultants fairly and accurately reflect their employment status. Things to consider include: what the workers' responsibilities are, who controls them (when/how/where they work), how they are paid and if they are directly in receipt of any benefit or expenses. Recent case law has repeatedly demonstrated that, while a court or tribunal will use the terms of a contract as a starting point, it will always look beyond these terms to the reality of the working relationship in order to determine worker status.
Implementing the relevant processes and procedures will inevitably be costly for businesses, so it is critical to include IR35 work streams within monthly or annual budget forecasts. This is currently particularly important while navigating the uncertainties associated with the COVID-19 pandemic, which is having an impact on all businesses, albeit at differing levels.
- Get the payroll teams up to speed with the changes
April is the financial year-end for many businesses and payroll teams are often at their busiest in the lead up to, and during, this period. Therefore, updating payroll processes as necessary ahead of April will reduce the burden on payroll teams and ensure that the practical transition is as timely and streamlined as possible.