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IR35: Scope of off-payroll rules changed from April 2020

Only payments for services delivered from 6 April 2020 will be subject to the off-payroll rules in the private sector, which is a switch from the rules applying to payments made, irrespective of when the services were performed.

7th Feb 2020
Tax Writer Taxwriter Ltd
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HMRC made this sensible announcement on 7 February 2020. Now engagers and contractors can make a clean break from Monday 6 April 2020, such that the work performed by contractors from that day onwards is reviewed by the engager for compatibility with the IR35 rules.

Where that contract is determined by the engager (end-client) to fall within IR35, the person in the hiring chain who has responsibility for paying the contractor must deduct income tax and employee’s NIC under PAYE from any payments made for those services. 

Where the services are performed by the contractor before 6 April 2020 it will continue to be the responsibility of the contractor and his personal service company (PSC) to decide if the work falls within IR35 and pay the right amount of tax to HMRC.

Bit late

As originally drafted the roll-out of the off-payroll rules was to apply to payments made to contractors on and after 6 April 2020, irrespective of when the work was performed. This would mean that work performed in February and March 2020 would be drawn into the off-payroll rules, as where the payment terms were 30 days or more, payment for those services would not be made until after 6 April 2020.

However, some commentators like Qdos' CEO Seb Marley have questioned the timing of this announcement: “The government claims it is taking ‘early action’, but with less than two months to go until the off-payroll reform arrives, this is a last-minute change that could easily confuse businesses further – albeit a tweak to the rules that gives agencies and end-clients a few extra weeks to prepare,” commented Marley.

“Most businesses impacted by off-payroll reform have spent time and incurred costs changing arrangements to take into account the original rules. Nonetheless, our advice to agencies and end-clients is to use this time wisely – communicate with the contractors you place and conduct well-informed and case-by-case IR35 assessments,” he added. 

Why now?

This change in the trigger point from “payment date” to “performance date” has been prompted by the ongoing review of how the off-payroll rules will be implemented. That review is due to conclude later this month, but HMRC said the payment point was a common issue raised over the course of the review, and so it was giving businesses certainty by making the announcement of the change now.

Delay it

This may not be the last change to the off-payroll rules made before the go live date of 6 April 2020.

The professional bodies who are involved in the implementation review have all previously called for a delay in the roll-out until  April 2021, on the basis that the rules are over-complicated and will create compliance burdens for taxpayers, employers and HMRC. The CIPP has argued that a delay in delivery would benefit both employers and HMRC. 

Another review

The House of Lords Finance Bill select committee has also launched a call for evidence into the draft Finance Bill 2019-20, which will focus on the extension of the off-payroll rules to the private sector. This committee will collect written evidence until 25 February, and is expected to issue a report sometime before the Finance Bill is passed in July 2020. This may be too late to prevent the new rules from taking effect in April 2020.

Fresh guidance

HMRC has rushed out updated guidance on the revised off-payroll rules published in a new section of its Employment Status Manual (ESM) at ESM10000 onwards.

This now states (at ESM10001a): “The new rules will apply to payments made on or after 6 April 2020 only where the services were also provided on or after 6 April 2020…If the services were all provided prior to 6 April 2020, but the payment was made on or after 6 April 2020, the payment would not be subject to the new rules.”

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Replies (12)

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By NeilW
10th Feb 2020 11:00

Now that contractors are paying PAYE like an employee, when will there be a push to equalise employment law with the tax law.

The ability of big companies to turn employees into 'workers' by shoving intermediaries in the way must be removed. Payroll agency is one thing. Rights avoidance another.

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By cereus77
10th Feb 2020 11:54

Agreed.

Of course we have yet to see how many contractors will feel they can afford to contract in the UK from April.

The prospect of being remunerated as a temporary employee without benefits and on the assumption that an endless stream of work is available so it’s reasonable to tax as though the income earned on a contract is continuous is not an attractive one.

Not to mention no possibility of claiming business travelling expenses and the (to my knowledge) as yet unclear issue of where the employers NI will land.

In my view those implementing this kind of poorly thought out “one size fits all” legislation do not deserve to be crowned with success or indeed to reap the supposed financial benefits that their simplistic spreadsheet modelling predicts.

I for one will be doing my best to work outside the UK from April onwards!

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By whatdoyoumeanwashe
10th Feb 2020 12:17

Market forces will resolve these issues. I have a large number of contractor clients, the majority of whom will be closing their limited companies and either taking permanent jobs or PAYE fixed term contracts. Some of the latter are having their rates cut to cover the employers' NI cost. Some are having their rates increased to cover their own increased tax bill, although this figure is fairly insignificant given the 7.5% extra income tax on dividends that they will no longer suffer, and the pension contributions they will receive. I used to work in investment banking, and the banks regularly colluded to cut contractors' day rates in times of downturn. A blanket 10% cut in day rates across most if not all banks happened several times that I can recall. Thus what end clients do to contractor's day rates as a result of all this will come out in the wash. The work will still need to be done, and pay rates will be sufficient to ensure there are people to do it. If you choose to work outside the UK, there will be someone else to do your work.

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By pauljohnston
11th Feb 2020 09:05

" there will be someone else to do your work.". Yes but that person may not be in the UK so we all loose out.

Market forces have meant that contractors (day rate contractors) have filed in the swings in our labour market requirements for the country as a whole. I suspect that many will become employees and the flexibility is lost. I had thought HMRC would have learned when it lost many of its contractors in March 2019 but evidently not so.

As side from that "employers" are having problems with recognising the difference between day workers and those that quote for a job. This will too impact on the job market too.

I understand the need to make contractors pay more but In do wonder if this will be anothers pigs ear which does not increase the yield by as much as HMRC predict. If you need to look at other pigs ears, duty on spirits and more recently increase in SDLT rates

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By whatdoyoumeanwashe
11th Feb 2020 10:06

Contractors will only become employees if their "clients" want them to. I have a number of clients whose clients have been trying to get them to go permanent for years, but they've refused to do so until now, usually because they overestimate how much extra tax they'll have to pay, and the fact that that figure is probably less than the pension contributions they'll receive.
I don't think this is so much about contractors paying more. The introduction of the 7.5% income tax premium on dividends did that fairly well. The big impact for HMRC is surely the end client paying employers' NI. I'm going to lose about half my clients as a result of this, but I can't really fault the logic in charging employers' NI in these situations. If you want to look at a pig's ear, look at the effect of the £10k restriction on annual pension contributions on NHS doctors. That is an absolute disaster.

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By johnjenkins
10th Feb 2020 13:30

I don't think the work givers are that bothered anymore as most of the current "contract for services" I have seen have a clause making all liability, of any tax and NIC due caused by any form of investigation from whatever source, planted squarely on the work doers.

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By whatdoyoumeanwashe
12th Feb 2020 13:38

I'm not a lawyer, but I can't see how a clause like that could work. The new rules will be that the end client is responsible for determining the IR35 status of the worker, and will be liable if HMRC proves their determination to be wrong. Surely you can't put a clause in a contract to transfer tax liability to someone else? If I enter a contract with a friend whereby I pay them a fixed amount and they pay my tax bill, whatever it turns out to be, HMRC aren't going to listen when I tell them it's not my tax bill anymore, and to go and ask my friend?? I know you can buy IR35 insurance, but even then the liability remains with the insured party if the insurance didn't pay out for whatever reason.

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Replying to whatdoyoumeanwashe:
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By johnjenkins
12th Feb 2020 14:24

With respect, I suggest you have a look at the new "contract for services". Now if it stands up in court is another matter.

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By gilbert1QR
12th Feb 2020 10:21

It's been always like that.

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By johnjenkins
12th Feb 2020 11:51

No. The previous contracts just stated that the subbie would be liable just for their own tax and NIC. This is different.

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By AndrewV12
13th Feb 2020 11:38

I think we all going to loose clients from construction workers to coach drivers, I am currently advising Directors of Limited Company's how much equivalent PAYE income they will be to be on par with a Ltd Company earnings.

In one case an employer stated how much take home pay a Director currently takes home trading as a Ltd Company contractor, the figures were wrong, take home pay (profit was understated), other things were factored into calculations. payroll costs????, Employers NI ????, but holiday pay was included in calculations, I agree with that one.

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By whatdoyoumeanwashe
13th Feb 2020 12:31

What about pension contributions? Sick pay, parental leave, death in service, job security, future payrises, promotion prospects (OK, maybe not for a coach driver)? My clients keep asking for equivalent paye income figures but I'm reluctant to give them without a lot of caveats as I think it's foolish to make these decisions purely on what the net take-home pay is.

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