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IR35 - has COVID-19 changed the view on tax status ahead of the 2020/21 changes?

Before they restart their deferred IR35 projects, organisations should look again at whether contractors are inside or outside of IR35.

Events caused by coronavirus (COVID-19) may have changed some of the reasons why contractors may have been pushed more towards ‘inside IR35’ in some cases pre-COVID-19.

We fully expect the proposed IR35 changes to come into effect on 6 April 2021. Organisations should consider approaching some of the work they have been doing around contractor populations from a slightly different perspective in order to fully prepare.

From our work with organisations around these matters, we have prepared the following advice as businesses start to prepare for next year.

Deferred implementation of IR35

On 18 March 2020 the Government made the announcement that IR35 was once again being deferred. In light of COVID-19 the Government was focusing efforts on ensuring businesses survived rather than increasing compliance load at a time of uncertainty. It was postponed by a year, to 6 April 2021.

Our view is that nothing short of a significant second national lockdown will stop April 2021 being the start date. The continued inconsistency between the public and private sectors, coupled with the need for the anticipated revenues, make this a necessary step to support the recovery from the current recession.

A reminder of IR35

IR35 applies where an individual provides services to a client under arrangements involving a third party, such as a Personal Service Company (PSC), and the individual. The new rules will only apply if the services would be deemed to be an employment relationship had it not been for the imposition of an intermediary. The impact is that payments to the intermediary are treated as employment income and PAYE and NIC will be applied by the payer. These rules apply even if there is an Agency in the chain - that will simply shift the administrative process for applying PAYE to payments.

Essentially the changes from April 2021 do three key things: 

  1. Move the assessment of whether PAYE and NIC should apply from the PSC to the “End user”
  2. Move the PAYE administration burden up the chain from the PSC to the payer (typically would be the end user or an Agency intermediary)
  3. Introduce requirements for communication along the chain and a dispute process should the decision taken by the end user not be agreed with.

Taking a step back

Our economy benefits from a flexible labour pool, especially during times of disruption - and the pandemic has provided a real shift in how people work.

This will become more important as the economy evolves and rebalances over the next few years to respond to increased home working and other related changes from the last few months.

The Government suspected that some contractors mis-classify their employment status for tax purposes and that this would cost the economy £1.2bn each year by 2022. The proposed changes around IR35 are all about making the end user determine the status rather than relying on the PSC to self-assess. Therefore there is expected to be a shift from outside to inside IR35 status. This means that tax is collected earlier via PAYE rather than through self-assessment and National Insurance is also captured.

Assessment and managing risks as an End User

HMRC relies on the Check of Employment Status for Tax (CEST) tool for assessing whether a role should be inside or outside the scope of IR35. We don’t expect this to change significantly, if at all, during the coming months, other than perhaps some additional guidance or examples as a result of recent changes such as interpretations based on case law. However, you need to look at all of the facts to hand and the expectations about the role, along with case law to form a view on status. The CEST tool is not everything and often can leave employers with further questions to reach a final conclusion.

Impact of coronavirus

The way that organisations work with contractors may have changed significantly since February. For example there may have been a presumed mutuality of obligation (‘MOO’) to provide work and offer services if a contractor had undertaken work for the same business for some time. During the COVID-19 pandemic many contractors will have seen a significant reduction in work offered which will have led to higher reductions in working time than employees. Does this imply that there never was a MOO?  

Before COVID-19 contractors may have worked at the client site and been largely indistinguishable from employees in some areas. But we now have a situation where they work from home, supply their own equipment and are not under direct supervision or control. There probably isn’t even a Christmas Party to go to / not go to! Does this change the tax position?

There will be a lot of discussion over the coming months and as businesses prepare for April 2021. They will need to review decisions taken around status in light of changes to the way people have worked since lockdown. In particular, a potential change around the level of oversight and control over contractors who have demonstrated that roles can be undertaken at home with less supervision and direction.  

Where roles might have originally been assumed to be within IR35 (if that is what the draft assessment concluded when undertaken back in 2020) it’s important to take a step back and reconsider the questions again and how responses may have changed. Of course, there is a risk that assessments that were previously concluded as inside IR35 may now be found to be “undetermined”. This highlights the importance for all businesses of having a robust process for reaching a conclusion. In other words, a consistent approach and methodology with an audit trail, along with a well thought through process to manage inevitable disputes in line with the statutory timeline.

Where next?

Even with CEST and taking a step back to look at the full picture for each engagement, it remains clear that all engagers of PSCs will need to maintain a thorough audit trail to support the conclusions drawn. There are interactions and potential implications with legislation such as the Corporate Criminal Offences (CCO) Act where businesses will want to demonstrate that they have taken accurate steps to make their own assessment. One of the observations from early 2020 was that a lot of businesses pushed assessment down to line managers. But it’s vital that this is brought back up to a central team to review for consistency. Are two identical roles getting different outcomes? Risk management should also to review issues such as if the business provided sufficient training and support to enable line managers to make assessment decisions.

Contact us

Julian Sansum

Julian Sansum

Partner, PwC United Kingdom

Tel: +44 (0)7919 057454

Phillippa O’Connor

Phillippa O’Connor

Reward & Employment Leader, PwC United Kingdom

Tel: +44 (0)7740 968597

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