Government to delay IR35 changes for 12 months

With less than a month until the planned roll-out of the controversial IR35 tax legislation, the Government has announced it will now delay the change for a whole calendar year. The news comes as the UK economy comes under acute pressure from the Covid-19 pandemic.

On April 6th 2020, the reformed IR35 regulation was set to see medium and large businesses forced to set the tax status of certain contractors and freelancers – where previously this tax status was set by contractors and freelancers themselves. The fact that the landmark legislation will allows HMRC to collect additional payment where a contractor is an employee ‘in all but name’ is something which many expect to have major repercussions for Britain’s burgeoning gig economy.

Following the change, contractors who had previously seen fit to trade job security and benefits – such as pensions contributions, holiday and sick pay, or parental leave – for a slightly higher salary would be forced to pay the same tax and National Insurance contributions as full-time employees. As contractors would then be essentially doing the same work, but for less, businesses subsequently feared an exodus of talented contractors – either abroad, or to British SMEs, who will be unaffected by the new reforms.

Just weeks before the controversial decree was set to come into force, however, the government has postponed the implementation of its reforms in the private sector by one year, in a bid to protect the economy against the coronavirus outbreak. Speaking at a Budget debate in the House of Commons, Chief Secretary to the Treasury Steve Barclay announced a year-long reprieve for contractors, as the reforms to IR35 off-payroll working rules will now come into effect on 6th April 2021.

The news comes shortly after a white-paper from consulting firm Sionic suggested that in response to the economic slump caused by Covid-19, the Government might deploy similar tactics to those it would during a standard recession. In order to stop a collapse in commercial activity, the study suggested governments could deploy tax holidays or reductions in payroll, sales, and value-added taxes. Meanwhile, Sionic’s paper suggests that providing purchasing power to middle- and low-income households – the groups which spend the largest portion of their regular income – can stimulate economic activity.

By delaying IR35’s reforms, the Government will hope that a large number of freelance workers will see their trade-off between pay and benefits continue to boost their short-term spending power. As the UK retail scene continues to endure a period of terminal decline, many in the sector will hope that the policy can revive the troubled British high street.

At the same time, it should provide mid-tier businesses with a lightened administrative burden, at a time when time and resources are badly needed elsewhere. The move by no means solves every problem, however. According to Victoria Goode, a Consultant Partner at professional services firm Lewis Silkin, the news may still come too late for some.

In a comment to the press, Goode stated, “This is a welcome move by the government. It gives business the flexibility in these uncertain times to continue to use contractors who are providing their labour via personal services companies or partnerships - PSCs - crucially without the additional employer NIC... It also relieves businesses of the administrative headache of assessing status… However, for businesses who have traditionally used PSC contractors and are well-advanced in their IR35 preparations, the changes may come too late.

Goode added that with so little time before IR35’s changes were due, many businesses may have already terminated arrangements with contractors, or employed contractors in-house. At this point, those businesses may not be able or willing to unpick their new arrangements.