IR35 rules for private sector will not be retrospective

IR35 contractors mid-way through a contract when the off-payroll working rules for the private sector come into force in April will only go on payroll from the new 2020-21 tax year, reports Sara White

The government has confirmed that the rules will not be retrospective and changes to the operation of the off-payroll working rules will only apply to payments made for services provided on or after 6 April 2020.

This means that the new rules will only affect the contract from 6 April and would not affect the pre-April 2020 element of the contract.

The government reversal means that the rules for medium and large organisations will take effect for work conducted from 6 April 2020 only.

There has been a storm of criticism over the lack of clarity about how the rules would be enforced for contracts straddling the effective date. This was causing confusion among medium and large businesses and contractors affected by the rule change.

Earlier this week, the House of Lords Finance Bill sub-committee launched an inquiry to investigate the IR35 implementation plans.

Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out.

It means organisations will now have to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020, rather than mixing two tax years.

Nimesh Patel, tax manager at Grunberg & Co, said: ‘HMRC’s review and its new decision will provide a sense of relief to many contractors, agencies and the end clients that engage their services, as it means that the rules will not be applied retrospectively to previous works conducted before 6 April 2020.

‘Many feared that work or projects that ended before this date could be included within the off-payroll rules if payments related to this work were made after its introduction, but this will no longer be the case.

‘This will help contractors to better budget for the changes, but may add additional complexity to the calculation of payments on projects that bridge the change of rules.'

There are still calls for a delay to the rollout of the off-payroll extension to the private sector.

Dave Chaplin, CEO at Contractor Calculator, said: 'HMRC is trying to buy more time to shore up the impending disaster. It will buy them about another month to work out how to solve this HMRC-created crisis. They are grasping at straws here. 

'It needs another full year delay, and a full independent research piece involving all parties in the supply chain. Then a complete rethink.'

The IR35 rules were first introduced in 2000; then three years ago, from 6 April 2017, the liability moved to hirers at public sector organisations, who were the first employers to be responsible for income tax and national insurance contributions’ (NICs), and had to pay contract workers under PAYE rules. It also meant employers had to pay employer NICs for these contractors.

HMRC said that the measure is ‘designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same income tax and national insurance contributions as those who are employed directly’.

From the government’s point of view it wants to curb the use of personal service companies which contractors set up and therefore are able to pay corporation tax, currently at 19%, and no NICs, unlike PAYE employees.

Anti IR35 campaign group, Stop the Off-Payroll Tax, is planning a demonstration in Westminster on 12 February to lobby MPs to stop IR35 reform plans.

A review of the IR35 implementation plans is still underway and is now going to be completed this month. However, draft legislation has already been released raising questions about the value of the review.

The draft off-payroll working legislation, currently out for consultation, will now have to be changed. 

The announcement shows that the government is at least listening to the cacophony of criticism over the proposals.

It is not clear when any findings will be published, but today’s announcement indicates that the government is conscious of the huge backlash from contractors and the impact of companies, particularly in the financial sector, forcing IR35 contractors on to their payrolls.

HMRC will write to those that have already attended webinars or one-to-one meetings to explain the change, and all guidance will be updated.

Contractors can find information about changes to the off-payroll working rules in HMRC’s IR35 Contractor Factsheet

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