The government has put its reforms to the IR35 tax rules on hold until 2021 to alleviate pressure on individuals and businesses amid the Covid-19 pandemic.
In what it described as a ‘deferral, not a cancellation’ the government says it remains committed to reintroducing the policy that would see medium and large private sector businesses become responsible for setting the tax status of all contract workers they use from April 2020. These rules had previously only applied to the public sector.
What is IR35?
IR35 was introduced in 2000 as an anti-tax avoidance measure. Chancellor Philip Hammond introduced reforms to IR35 in last year’s Budget which were aimed at tackling ‘disguised employment’. This refers to people providing freelance services through personal services companies to reduce their tax bills. However, the HMRC believe they should be treated as employees and be taxed at source through payroll. From 6 April 2021, private sector businesses who meet the criteria will be required to determine the employment status of such individuals and therefore whether the ruleswould apply.
The rules will apply to private sector businesses who meet two of the following criteria:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees.
Reforms to legislation
Critics of the reforms believe that it will mean ‘no-rights employment’ which will see people paid and taxed the same as regular employees but with none of the protections or security that accompany permanent employment. For instance, anyone working within IR35 can be fired at any time without reason.
However, the Treasury insisted the changes were necessary to tackle what it believes is the current unfairness surrounding non-compliance. The HMRC believe that just one in 10 private-sector contractors who should pay tax under the current rules do so correctly. It anticipates that by 2023, these reforms to IR35 will recover £1.2bn a year.
Who does IR35 apply to?
You may be affected by IR35 if you are:
- A worker providing services through an intermediary
- A client receiving services from a worker through an intermediary
- An agency providing workers’ services through an intermediary.
The proposed changes would affect people in the private sector, such as management consultants and IT workers, who typically pay less tax by establishing themselves as private companies. If the rules apply, tax and National Insurance contributions will be deducted from fees and paid to HMRC.
If you are a contractor, how much this will affect you will depend on how much you earn. However, you will likely get an annual pay cut of around 20%.
Tax reforms delay
The government has postponed the IR35 tax reforms until 2021 to alleviate the inevitable pressure on individuals and businesses following the Coronavirus outbreak. However, the government is committed to reintroducing the policy in April 2021 to ensure those working like employees but through their own limited company pay the same rate of tax as those workers employed directly.
The delay to IR35 was part of a wider emergency package worth £350bn to support UK businesses as the country steps up efforts to tackle Covid-19. The Treasury promises to guarantee loans of £330bn so that firms can stay in business despite facing a near-shutdown that will likely last for months. Chancellor Rishi Sunak also outlined plans to spend £20bn in grants and waiving business rates to help those firms worst affected.
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