Budget 2018 – IR35 ‘off payroll’ reform to hit private sector from April 2020

The Budget has been delivered. The Chancellor announced that the IR35 ‘off-payroll’ rules will be extended to the private sector from April 2020.

Budget 2018 Key Points for contractors

The all-important Budget ‘Red Book’, which contains the detail of today’s Budget has been published here.

• The IR35 ‘off-payroll’ rules will be extended to the private sector from April 2020. It will apply when clients are ‘large or medium-sized’ businesses (see below for further details).
• The Annual Investment Allowance (AIA) will be extended from £200,000 to £1m per year from January 2019 for two years.
• Entrepreneurs’ Relief will not be abolished, but the minimum qualifying period will be extended to two years.
• The VAT registration threshold to be frozen at £85,000 for an additional two years.
• The personal allowance will be raised to £12,500, and the higher rate threshold to £50,000 from April 2019. One year ahead of schedule.
• No changes were made to pension tax relief, contrary to pre-Budget speculation.

IR35 private sector reforms from April 2020

The off-payroll rules themselves were first imposed upon all public sector organisations from April 2017, attracting widespread criticism from across the business world.

Despite the chaotic implementation itself, and a complete lack of confidence in the accuracy of the CEST tool (which ‘helps’ clients work out the employment status of contractors), a consultation over the extension of the rules to the private sector was run from mid-May until August 10th this year. The prospect received a resounding thumbs down from industry.

Despite this, the Chancellor announced an extension to the private sector will take effect from April 2020. Here is the extract from Page 42 of the Red Book.

3.8 Off-payroll working in the private sector

To help people comply with the existing rules and bring private sector organisations in line with public-sector bodies and agencies, the government will reform the off-payroll working rules (known as IR35) in the private sector.

This follows consultation and the roll-out of reform in the public sector. Responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker. To give people and businesses time to prepare, this change will not be introduced until April 2020.

Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.

What is a ‘small organisation’?

We presume that a ‘small organisation’, as defined by the Companies Act 2006, is one which has fewer than 50 employees, a turnover of under £10.2m, and total assets of £5.2m or less. However, this new qualification is bound to add even further complexity to the way IR35 operates.

We expect clarification on exactly what a ‘small organisation’ is prior to the new legislation taking effect.

On this particular point, Julia Kermode, chief executive of the FCSA, said: “In an interesting move, the Chancellor decided to level the playing field between public and private sectors, but only for large and medium businesses, thus letting SMEs off the hook.  This is somewhat foolhardy given that large businesses are precisely the ones that are least well-placed to accommodate the change due to the impact on their IT infrastructure should they need to process deemed payments to their contractors.”

Further notes on IR35 private sector reform

• The new rules will take effect from 6th April 2020.
• You can read a summary of responses to the private sector consultation here.
• The Government says that the new rules have been delayed until 2020 to “allow businesses time to review existing contracts and make the changes needed to their systems and processes.”
• The Government will work with stakeholders to improve the CEST tool (used by clients to determine the employment status of contractors) prior to April 2020.
• A new consultation will take place on how the new rules will be operated in practice.
• There will not be a retrospective element to the private sector IR35 extension.

IR35 changes will be complex for businesses to implement

Julian Sansum, employment tax partner at PwC said that the Chancellor’s decision to delay implementation until 2020 was welcome, however, he stated that “the impact of these reforms should not be underestimated, and arguably represent the most significant changes to the operation of employment taxes for many years.”

“There will be direct cost implications for businesses which decide their contractors fall within the IR35 rules, largely driven by employer NIC and Apprenticeship Levy totalling 14.3% which will be chargeable on contractor fees.  In addition, businesses will need to make the necessary changes to their systems and processes, which could be complex.

“Furthermore, businesses will need to question whether this opens the door for further reform on the extension of employment rights to contractors.  We have already seen some claims for employment rights such as holiday pay being brought to tribunal as a result of the public sector reforms, and the changes announced today are likely to increase the volume of those types of claims.”

Read our latest article – April 2020 IR35 changes – what happens now?