HMRC have announced they are delaying the controversial IR35 changes for 12 months amid the Coronavirus pandemic.
Previously due to be introduced in April, the new rules will now not be introduced until April 2021, as the construction industry releases a collective sigh of relief.
The changes were expected to cause widespread disruption throughout the industry.
The Chief Secretary to the Treasury, Steve Barclay, said on Tuesday the move was a “deferral, not a cancellation and the government remains committed to reintroducing this policy.”
What is IR35?
IR35 is a set of tax legislation designed to prevent tax avoidance by workers and the businesses hiring them, who supply their services through an intermediary (like a limited company) but would be an employee if the intermediary company was not used.
HMRC considers these kinds of workers ‘deemed employees’, and if they are caught by the IR35 legislation they have to pay income tax and National Insurance Contributions as if they had been employed.
For workers, the financial implications of IR35 are quite significant, and it can see their net income reduced by as much as a quarter.
Off-Payroll Tax replaces IR35
Whilst IR35 has been in force since April 2000, it has been criticised by the business community for being badly implemented by HMRC. For this reason, the government will replace the original IR35 regulations with the new Off-Payroll Tax.
Off-Payroll Tax was implemented for the public sector back in April 2017, and will be now rolled out to the private sector in April 2021.
For genuine contractors, freelancers or consultants it’s important to make time to understand how the legislation works in order to avoid an investigation by HMRC.
Why did the government introduce IR35?
IR35 was brought in to address the issue of ‘deemed employment’. That’s where companies use workers on a self-employed basis and through an intermediary, instead of through an actual contract of employment, meaning they become deemed, or "disguised", employees.
Doing this saves the company a huge amount, as they avoid paying the employers’ National Insurance Contributions at 13.8% along with the Apprenticeship Levy where applicable. Not only does the company save cash, but they also don’t have to offer any kind of employment rights or benefits, such and statutory holiday or sick pay.
It was hoped that IR35 would not only recover lost tax yield, but also help to defend workers’ rights. Unfortunately, the legislation in its current form has proved unenforceable and has not delivered on either of those objectives.