The Off-Payroll tax reforms, also known as IR35, were initially set to be rolled out to the private sector in April this year, but were delayed until April 2021 due to Covid-19. MP David Davis had called and campaigned for changes to the IR35 reform in the private sector to be delayed until 2023/2024.
The Finance Bill had passed through the Report Stage yesterdayThe Report Stage represented the last realistic opportunity for MPs to prevent a 2021 implementation of the rules in their current format. The Bill is now heading towards its Third Reading and then through the Lords, a process which is largely ceremonial.
The proposal for a further two-year delay of IR35 fell short of a majority vote in the House of Commons, losing by 317 votes to 254.
While the IR35 rules are already in place in the public sector, the legislation for extending them into the private sector will take effect from 6 April 2021. The legislation means businesses will be responsible for determining whether the contractors they hire are liable to pay income tax and national insurance contributions, and if so, for paying those sums.
The reforms are aimed at stopping tax avoidance by disguising employment through so-called personal service companies, which has been used by many independent contractors and was estimated to cost the exchequer £1.3 billion a year by 2023-24, according to HM Revenue and Customs figures published in 2018. Nevertheless, the reforms have been characterised as flawed and the subject of long-running opposition.
Dave Chaplin, Director of The Stop The Off-Payroll Tax Campaign and CEO of ContractorCalculator said, “It is very disappointing that after four years of campaigning we have not achieved the primary aim of stopping this legislation. We, and our 4,000 campaigners, did everything we could, and the Lords Report, from their inquiry into the so-called reforms, accurately detailed the damaging effect these changes will have on the UK’s flexible workforce. We are delighted that MPs tabled amendments to the Finance Bill, to prevent the damage, but sadly our MPs chose not to back them in sufficient numbers.”
“Moving forward, the market now needs to prepare and, with careful planning, firms have nothing to fear and can hire freelancers compliantly,” Chaplin said. “We have already had a dress rehearsal, and many firms and contractors saw what would happen if they did not prepare properly. We now need to work together to avoid a cliff edge scenario.
“Over the next year we will be seeing more clarity from the courts, as binding authorities are released – and these are likely to favour the self-employed and provide a legal bedrock upon which firms can compliantly hire contractors, without fear of later repercussions,” Chaplin said. “Provided firms work with specialists in this field, they should have nothing to fear.”
Seb Maley, CEO of IR35 specialist Qdos, said, “IR35 reform in the private sector has effectively now been signed off and will arrive in April 2021. Despite concerns raised by a number of MPs, who rightly exposed the flaws of this legislation and made it clear they do not believe changes are necessary, it seems there’s no turning back now.”
“The reform is short-sighted and if mismanaged poses a risk not just to contractors but to hiring organisations and recruiters. It’s therefore up to private sector firms to prepare for the changes, which can be managed with the right approach,” Maley said. “For companies to compliantly engage genuine contractors beyond April 2021, they must avoid risk-averse policy decisions and instead prioritise fair and considered IR35 status assessments. Whilst our work alone shows that thousands of businesses will be ready for the changes, many other companies – from banks to oil firms and pharmaceutical giants – should rethink how they plan to manage this reform.”
John Bell, Founder and senior partner at insolvency practitioner Clarke Bell, said, “The news that Off-Payroll is going ahead in 2021 is very disappointing and contractors and the firms that hire them will be bracing themselves for a challenging time ahead. The pending legislation is already having a huge impact on the lives and livelihoods of contractors and we have a seen a surge in the number of enquiries from contractors seeking to close down their limited companies as a direct result of the IR35 changes. Covid-19, Brexit and Off-Payroll combined means that the UK economy is set to suffer immeasurably in the years to come.”