IR35 private sector reforms: Treasury review concludes no delay needed to April 2020 start date

The government has refused to bow to pressure to delay the April 2020 roll-out of the IR35 reforms to the private sector, but has assured organisations that it will take a “light touch” to enforcing the new rules for the first 12 months.

HM Treasury confirmed both moves within the pages of its highly anticipated review of the IR35 reforms, which was geared towards ensuring that its latest attempt to clamp down on disguised employment within the self-employed sector would be “smoothly” introduced.

The 23-page document states that during the evidence-gathering stage of the review, the government received calls from stakeholders to delay the reforms, but has declined to do so.

The report acknowledges that there “remains some opposition” to extending the reforms to the private sector from 6 April 2020, but “the government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules”.

Therefore, from that date, medium-to-large private sector organisations will assume responsibility for determining whether the contractors they engage should be taxed in the same way as salaried employees (inside IR35) or as off-payroll workers (outside IR35), based on the work they do and how it is carried out.

At present, it is down to the contractors to self-declare whether their engagements fall inside or outside the scope of the IR35 regulations, but it is claimed that some individuals have abused this system by mis-classifying themselves as off-payroll workers to minimise their employment tax liabilities.

So much so that HM Revenue & Customs (HMRC) claims that non-compliance with the IR35 rules is on course to cost the Treasury more than £1.3bn a year by the 2023-24 tax year unless corrective action is taken.

The report also confirms comments made in a leaked video address by the new chancellor Rishi Sunak earlier this week, in which he moved to assure business leaders that HMRC would not take a “heavy-handed” approach to enforcing the reforms during the first year.

On this point, the review states that private sector firms will not face financial penalties for any “inaccuracies” that emerge in how they have implemented the new rules for the first 12 months, unless there is evidence of deliberate non-compliance.

In the lead-up to the reforms coming into play, Computer Weekly has reported on numerous instances of private sector organisations reacting by banning limited company contractors from working for them.

Finance secretary Jesse Norman has gone on record previously to play down such reports, claiming the government’s own “independent research” had suggested this scenario “has not generally been the case to date”.

The review takes a similar line, with the government stating that it is “aware” that some organisations “are considering” whether limited company and personal services company setups are the best way to “engage contractors”, but has seen no evidence to suggest an “overall change in demand for the services and skills that contractors offer”.

There have also been reports of private sector organisations hoping to achieve IR35 compliance by declaring that all the off-payroll workers they engage with are inside IR35, which, in turn, has led to anecdotal reports of contractors walking out across the IT sector.

Many IT contractors who are taking this stance have told Computer Weekly they are doing so partly out of concern that moving from an outside-IR35 to an inside-IR35 engagement while working for the same company might prompt HMRC to launch a retrospective investigation into their tax affairs.

On this point, the review reiterates past statements by HMRC that “information resulting from the changes to the rules will not be used to open new investigations… for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour”.

The review’s content is unlikely to come as a surprise to contracting stakeholders, given that much of it has been either pre-announced or previously alluded to by HMRC and the Treasury.

Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), welcomed official confirmation of the chancellor’s “light-touch enforcement” pledge for the first year, but said she feared this could be open to misinterpretation.

“There is mounting evidence that clients have been unable to fully prepare in advance of the April 2020 changes,” said Kermode. “However, we are cautious that this may cause more confusion if clients and contractors are misled into thinking that the legislation has been delayed or will not be enforced.

“This is good news, though, because HMRC’s education programme was delayed due to the General Election, so a number of businesses are only finding out about the reforms and their new liabilities now, just weeks before the legislation comes into effect. 

“However, the soft landing does not mean that businesses and individuals can plan to ignore the changes because HMRC has also confirmed that penalties will be applied where there is deliberate non-compliance.”

Seb Maley, CEO of contractor tax consultancy Qdos, said private sector organisations should proceed with caution when interpreting what “light-touch” enforcement of the reforms really means.

“While applying a ‘light touch’ to the reform for the first 12 months has been welcomed, this is a red herring,” he said. “It only applies to ‘penalties’, not necessarily tax liability owed as a result of inaccurate IR35 determinations. Therefore, private sector companies should not pay too much attention to this.”

Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), described the entire review process as “recklessly inadequate”, given that it was not independently chaired and was announced and completed in less than two months.

“The tweaks proposed by the review go nowhere near far enough,” he said. “If anything, this tinkering shows the government knows the changes to IR35 will be immensely disruptive to business and contractors, but it plans to forge ahead regardless.

“These off-payroll rules will be catastrophic for the contracting sector and will do serious damage to client businesses and the wider economy.

“Many businesses are already scrapping their contractor workforce because of these changes and, as we told the House of Lords inquiry, our research shows that at least a third of freelancers plan to stop contracting in the UK because of them. We continue to urge the government to rethink this disastrous policy before it is too late.”