The government has postponed changes to IR35 tax rules until 2021 to relieve the pressure on businesses during the coronavirus crisis, just a week after the Budget confirmed they would go ahead.
The IR35 changes would see workers previously classed as contractors now potentially determined as employees for tax purposes, with medium and large private sector companies setting tax statuses.
However, the move has been criticised for raising taxes and National Insurance contributions for contractors while denying them employment rights including holiday and sick pay, pension provision, and parental leave.
As part of a wider £330bn financial package announced yesterday, chief secretary to the Treasury Steve Barclay said the measures would now be introduced from 6 April 2021.
Barclay said: “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 broadly the same tax as those employed directly.”
Trustee companies may need to assess whether they are provided any services from individuals through an intermediary known as a “personal service company”. If this is the case, the trustee company, rather than the personal service company, will be responsible for deciding if IR35 applies. It may also need to meet PAYE obligations.
Squire Patton Boggs partner and head of London pensions practice Wendy Hunter explained: “The government’s view has been that there have been too many of these arrangements which result from careless or possibly in some cases abusive treatment of the rules such that the government isn’t getting the correct tax.”
She added: “So it’s been a long-held policy of the government that it would take the action to extend the application of IR35 to mirror what has already been the case in the public sector for a quite while.”
Hunter said the policy announcement would not originally have been a surprise to most companies, but the delay would be welcomed as providing extra time to understand the new rules.
“I don’t think many pension trustee companies have thought about its application to them. They key point here is directors of trustee companies are treated, or supposed to be treated, as subject to PAYE even if they’re not an employee. If they haven’t really thought about it up to this point, a year’s delay is probably quite useful.”
An exemption does apply if the company is considered ‘small’, although subsidiaries of larger groups may not qualify. Hunter said this is “more common than you think”
“Often corporate trustees were set up in the past as the subsidiary of the ABC Group plc, for example. That seemed an easier way of doing it. But as a result, they are a subsidiary and therefore caught.”
Similarly, lawyers have warned that the changing rules could see some contractors challenge their employment status, leaving some firms responsible for pension provision under automatic enrolment law.