IR35: What does its postponement mean?

Going freelance can be a scary venture but, thanks to the free advertising offered by social media, it’s now easier than ever to find work. It’s possible to gain exposure and attract clients simply by ensuring professional profiles are up-to-date. As the recruitment specialists at Salt explain, keeping LinkedIn pages loaded with experience and recommendations from previous employers is an easy commitment that makes the transition to contract work as smooth as possible.

This is encouraging given that freelancing is such an attractive prospect for so many people—it’s estimated that around 50% of the UK workforce will work this way by the end of 2020. However, this means of employment is under threat from an upcoming IR35 tax reform. A recent report revealed that more than half of contractors were planning to abandon their clients to avoid its effects. Self-employed workers who are within the scope of these regulations will therefore have to increase their tax payments, making roughly the same contributions as the full-time employees working for the same company.

The reforms were initially scheduled to take effect from 6 April 2020. However, this is no longer the case, as the UK government has now agreed to delay IR35 until 2021 as a result of the coronavirus pandemic. In light of this announcement, here’s what the future looks like for freelancers and contractors.

What is IR35?

First of all, it’s important to understand what IR35 actually is. IR35 forms part of the Finance Act and aims to prevent workers and firms from avoiding tax payments. It was originally introduced in 2000 but, in April 2017, the government altered the existing IR35 laws by introducing the Off-Payroll Reforms. This legislation affects anyone who works for a client through an intermediary—an individual or entity who arranges employment on someone’s behalf. The intermediary can be a personal service company, a partnership, a managed service company, or even just an individual contractor. Under IR35, workers who would be employed by the client if there was no intermediary will pay the same amount of tax and National Insurance as the client’s own employees.

This is supposed to tackle the problem of ‘deemed employment’, where businesses employ workers on a self-employed basis without a contract. Companies can then save money as they avoid paying National Insurance contributions of 13.8% or the Apprenticeship Levy. In effect, these workers become disguised employees.

So far, IR35 rules have only applied to the public sector, which has always been responsible for determining the employment status of its workers. For private sector companies, this duty fell to an intermediary. However, under the reforms, medium and large private sector businesses must bear responsibility for setting the tax status of every contract worker they use from the start of the 2020 tax year. This applies to companies who meet at least two of the following criteria: an annual turnover of £10.2 million or more, assets of £5.1 million or higher, or over fifty members of staff.

What does IR35 mean for freelancers and contractors?

IR35 is expected to affect 170,000 workers who will have the same tax obligations as a company’s full-time employees. This could see freelancers and contractors lose up to 25% of their net income, with devastating effects on their livelihoods and wellbeing, especially if they experience financial losses elsewhere.

It’s estimated that this measure will mean that 15% of freelancers will have to default their mortgages or sell their homes to subsidise the decreased income. Another huge concern is that contractors will only be treated as regular employees in terms of taxes, so they won’t receive any of the benefits offered to actual employees, such as holiday entitlement, sick pay, or maternity leave.

Why has the government delayed IR35?

The new reforms were put together in the wake of a government crackdown on tax avoidance, but IR35 was swiftly criticised for being poorly conceived and managed, as well offering confusing explanations about how it will apply. Following the outbreak of the coronavirus pandemic, the House of Lords was forced to acknowledge the economic impact of the crisis. It was announced on March 17 2020 that the reform would be postponed until 2021 to prevent further strain on the already struggling workforce. However, the Treasury emphasised that this was a temporary delay and the changes would still be implemented in due course.

The announcement given by Steve Barclay, the chief secretary to the Treasury, explained: ” This is a deferral, not a cancellation, and the government remains committed to reintroducing this policy to ensure people working like employees, but through their own limited company, pay the same tax as those employed directly.”

The IR35 reforms are now due to take effect from 6 April 2021.

What are the effects of postponing IR35?

Delaying the reforms has been welcomed by freelancers, many of whom are struggling for work in the current climate. In fact, they’re even more grateful considering that their time out of work could continue as businesses look for cost-cutting measures to deal with the economic fallout of coronavirus. “[Postponing] will be some comfort to the freelancer population who know that they will be the first overhead to be cut as businesses prepare to weather the storm ahead as the economy slows down,” Tim Stovold, partner at Moore Kingston Smith, told FT Adviser.

He also noted the businesses may be frustrated by the decision “as colossal amounts of time, money, and energy have been put into preparing for this regime change”. But Seb Maley, chief executive of IR35 specialist Qdos Contractor, suggested that waiting 12 months is better for all parties in the long run. “[It gives] private sector firms vital time to prepare for reform, which can only be a good thing for contractors,” he said. “What matters now is that businesses use this time wisely.”

What will the next 12 months look like?

Until the reforms are officially introduced in April 2021, the pre-existing IR35 legislation will continue to apply. This means contractors must still find out whether their activities fall ‘inside’ or ‘outside’ IR35 regulations and make sure they’re paying the correct tax.

Though the government is adamant that the new measures will come into force, organisations like IPSE (Association of Independent Professionals and the Self Employed) are working towards overturning the move. “This delay [..] is a last-minute reprieve and it gives us the chance to try to turn this around in the coming year,” it declared. “It is utterly dreadful legislation and we are aware that many MPs and policymakers are of that opinion. IPSE will spend the next year lobbying for the delay to become a permanent abandonment.”