An amendment to further delay IR35 changes in the private sector has failed to secure the necessary number of votes in parliament, confirming that the planned changes to off-payroll rules will still come into force in April 2021.
The finance bill, which includes the off-payroll tax changes, passed its third reading in the House of Commons yesterday, all but confirming the changes will come into effect next year.
The new rules – which will shift the responsibility for deciding how contractors should be taxed onto the employing businesses – were due to come into force this April. However, the rollout was pushed back to 2021 so as not to add to the burden on businesses caused by the coronavirus pandemic.
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Numerous business and freelance groups – many of which had opposed the changes – had hoped this year-long delay would provide an opportunity to push implementation back even further, and for a wider overhaul of the rules. However, the amendment to further delay the rollout to the tax year 2023-24 was voted down by MPs, 317 to 254.
Matt Fryer, head of legal services at Brookson Legal, said many employers were not ready for the original IR35 deadline this April and advised they use this extra year wisely. “Many businesses were woefully underprepared in the run up to the changes and were planning short cuts like blanket bans of all contractors,” he said, emphasising that the coronavirus outbreak had “bought businesses an extra year to get themselves ready”.
“Despite more pressing challenges presented by the coronavirus pandemic, we urge recruiters and hiring businesses to set out a clear timeline to make the necessary preparations and ensure compliance. Now we have a confirmed date to plan towards, contractors will be looking for clarity from hirers on where they stand,” Fryer said.
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Under IR35, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid the same tax regardless of whether they were an employee or contractor, and to prevent the misuse of personal service companies for tax avoidance.
The changes to IR35 in the private sector will shift the responsibility of assessing which contractors fall into this category from the individual contractor to employers. The changes have applied to public sector employers since 2017.
However, the change has been controversial with employers, and a House of Lords report earlier this year warned that the government had not sufficiently analysed the “unintended behavioural consequences” of the reforms. These included the risk of employers blanket-assessing contractors as falling inside IR35 – potentially subjecting the legitimately self-employed to a higher tax burden – or blanket moratoriums on the use of contracts, as was seen during the public sector rollout.
Dave Chaplin, CEO of ContractorCalculator and director of the Stop The Off-Payroll Tax Campaign, said it was “very disappointing” that the legislation had gone through despite four years of campaigning against it, but added that organisations must now prepare for the April 2021 deadline.
“Moving forward, the market now needs to prepare and, with careful planning, firms have nothing to fear and can hire freelancers compliantly,” he said. “We have already had a dress rehearsal, and many firms and contractors saw what would happen if they did not.”
The bill will go through a final reading in the House of Lords, where it is not expected to face any opposition, before being sent for royal assent.