AAB advises a reassessment of IR35 in light of Covid-19
Businesses should step back and look again at the implications of the IR35 off-payroll reform, writes Steven Fraser
In light of Covid-19, the UK Government announced in March that the launch of its Off-Payroll Tax reform was being delayed by a year until 6 April, 2021, to allow for a focus on business survival rather than increasing the compliance load in a time of uncertainty.
Despite the further restrictions implemented in recent weeks around the growing number of coronavirus cases, the view at Anderson, Anderson & Brown (AAB) is that nothing short of a significant second national lockdown will stop the changes to IR35 going ahead next April.
This is in line with the continuing inconsistency between the public and private sectors, coupled with the need for the anticipated revenues from the reform to support the recovery from the current recession.
Reminder of the changes
The government argues that existing non-compliance by personal service companies (PSC) under IR35 will cost the economy £1.2 billion every year by 2022.
This has resulted in a change in strategy by the government, with the changes from April 2021 doing three key things.
Firstly, to move the responsibility for completing IR35 assessments from the PSC to the ‘end-user’ of the PSC’s services.
Second, to move the PAYE administration burden up the chain from the PSC to the fee-payer and, thirdly, to introduce requirements for communication throughout the chain and a dispute process, should the status determined by the end-user be disputed.
These changes are expected to bring a shift from outside to inside IR35 status, seeing an increase in the number of PSCs being treated as employees for tax and National Insurance purposes via PAYE rather than through self-assessment.
Impact of c-19 on IR35 status
The UK economy benefits from a flexible labour pool, especially during times of disruption, and the pandemic has meant a real shift in how people work.
This will become more important as the economy evolves and rebalances over the next few years to respond to increased home-working and other related changes from the impact of Covid-19.
The way organisations work with contractors will probably have changed significantly since February 2020. For example, there may have been a presumed mutuality of obligation (MOO) between a business and contractor to provide work and offer services. During the pandemic, however, many contractors were the first to see their work stopped to save costs. Does this imply that there was never a MOO?
Before the Covid-19 outbreak, contractors may have worked at the client’s site and been largely indistinguishable from employees in some areas. But they are now more likely to work from home, supply their own equipment, and not be under direct supervision or control of the end-client. Does this change the tax position?
Where roles may have originally been assessed to be within IR35 ahead of the original April 2020 go-live date, it is important for businesses to take a step back and reconsider the questions again, and evaluate how responses may have changed. Of course, there is a risk that assessments that were previously concluded as being inside IR35 may now be found to be ‘inconclusive’, and so businesses must ensure they have a robust process for dealing with these situations.
Even with taking a step back to look at the full picture for each engagement, it remains clear that all engagers of PSCs will need to maintain a thorough audit trail to support their conclusions.
There are also interactions and potential implications with the Corporate Criminal Offences Act, where businesses will need to demonstrate that they have taken accurate steps to make their own assessment with reasonable care.
Steven Fraser is partner and head of payroll and employment taxes at Anderson, Anderson & Brown