HMRC: prepare for IR35 changes despite Covid-19 challenges

To help businesses prepare for the changes, HMRC's customer education and support programme is being relaunched as a series of webinars from 13 October. Final technical guidance on the changes to IR35 was also published on Monday. The guidance has been updated to reflect the final legislation included in the Finance Act 2020 and provide more examples and clearer explanations of how the rules should be applied.

Penny Simmons, a tax risk expert at Pinsent Masons the law firm behind Out- Law, said: "With more than six months until the new rules take effect, HMRC has given businesses extensive lead-in time to review the final guidance and ensure that they can introduce compliance process and procedures to deal with the new regime. Notwithstanding the intense challenges that businesses are currently facing owing to the Covid-19 pandemic, they should not delay preparing for the rules or rely on previous comments from HMRC that it is committed to a light touch to non-compliance penalties in the first 12 months."

"Businesses should be wary about over-reliance on assurances from HMRC, particularly with regard to the likelihood or otherwise of penalties for non-compliance. As we have seen recently with HMRC's surprise announcement overturning its previous guidance that UK VAT is not generally chargeable on early contract termination and cancellation fees, what HMRC says one day can change with no notice overnight. Given the extent of government borrowing over the past six months to support the economy during the pandemic, the Treasury will be looking for every opportunity to raise funds, and non-compliance with IR35 could be one weapon in its arsenal," said Simmons.

The IR35 rules require that employment taxes be paid by people who provide services to a business through an intermediary, usually a personal service company (PSC), if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

The rules are due to change from 6 April 2021. From this date, engaging businesses will be made liable for determining whether the IR35 rules apply. They will also be required to operate PAYE and pay employers' National Insurance Contributions. The changes will not apply to small businesses which engage contractors through PSCs.

The changes were originally due to take effect this April, but the start date was delayed a year as a result of the coronavirus pandemic.

Under the new rules, businesses will be required to provide a statement determining the employment tax status of contractors working through PSCs directly to the contractor, including reasons for the determination. Businesses may use HMRC's 'Check Employment Status for Tax' (CEST) tool to establish whether a contractor would be considered to be an employee for tax purposes. Contractors will have the right to disagree with the determination through a new business-led status disagreement process.

HMRC has reaffirmed its commitment to stand by a determination made under CEST where the information provided is accurate when the determination is made. However, HMRC has clarified once again that a CEST determination will not be valid if circumstances involving the engagement of the PSC subsequently change. Businesses are being encouraged to use the tool now ahead of April to aid their preparations.

"When making their status determinations, whatever tools businesses choose to use, the key will be to ensure that they collate information about their entire PSC population – including those engaged indirectly – and make determinations prior to April, whilst always considering the reality of the PSC contractor's engagement with the business and not just how the engagement is recorded on paper," said Simmons.