Changes to the off-payroll working legislation had been due to come into force in April 2020 but were delayed in connection with the COVID-19 crisis. Statements from HMRC suggest we should not expect a further delay.
HMRC has told businesses to prepare for the implementation of the IR35 legislation in April 2021 having delayed implementation from April 2020 as a result of the COVID-19 crisis. We raised the changes to the IR35 legislation in an article last year, noting that HMRC was sending letters to contractors working for GlaxoSmithKline (GSK) putting them on notice of arrangements which might fall foul of the rules. As contractor arrangements are relatively widespread in Life Sciences we want to remind readers when the rules apply and steps which might need to be taken before April.
To provide some context, the off-payroll working rules (typically referred to as IR35) were introduced in 2000 in an effort to ensure that contractors who provide services through their own company - but who act like employees - pay broadly the same tax as employees, regardless of the structure they work through. In other words, the legislation was intended to stop people who would otherwise be taxed as employees reduce their tax burden by providing services through a service company. Significantly, these rules do not apply if the individual is genuinely self-employed.
HMRC conducted a review of the current IR35 regime and concluded that there was widespread non-compliance on the basis that a number of individuals providing services through intermediaries were incorrectly treating themselves as self-employed and therefore not applying the IR35 regime. The review concluded that compliance would increase if the ultimate responsibility for determining status and operating PAYE shifted away from the intermediary and towards the end-user of the service. As the ultimate end-user of a service is more likely to be a bigger company (perhaps a major pharmaceutical), HMRC considered that if these changes were made, compliance would be more widespread and revenues would increase.
Updated IR35 rules were accordingly drafted and due to be introduced in April 2020. Although the rules were complex they essentially required an end-user to assess whether a contractor was employed for tax purposes and, if so, ensure PAYE was applied.
In the run up to April 2020 contractors and end-users were grappling with the application of the rules to existing arrangements and, in many cases, were not prepared for the changes. There was, therefore, a muted sigh of relief when the implementation of the changes was delayed to 2021 in the early stages of the COVID-19 crisis.
Some practitioners thought a further delay to the IR35 changes was likely given COVID-19 is likely to be causing disruption far into 2021. However, the recent HMRC October Employer bulletin references the changes and appears to commit to April 2021 implementation.
Parties to any impacted contractor arrangements should, therefore, either dust off prior planning for the regime change or start the planning now. As HMRC was writing to the contractors of GSK last year it would appear that they might target major businesses which historically engage contractors in order to maximise compliance and revenue. As such, it is quite possible that Life Science businesses will be under the spotlight and a focus of HMRC attention and, as such, businesses and individuals in the sector should be particularly mindful of the need to plan for the changes.
Any business which engages intermediaries should conduct a review of their arrangements and prepare to make status determinations in respect of each arrangement in good time. Depending on the outcome, businesses may then want to consider alternative engagement models for existing or future arrangements to reduce risk.
In contrast, an individual engaged through an intermediary might want to seek first-mover advantage and provide information which might assist the end-user with their status determination or otherwise take steps to try to protect their net income level. The individual may also want to consider if providing services directly (whether as an employee or consultant) might be preferable to the increasingly complex world of indirect service provision.