COVID-19’s Effect on IR35: Should You Reassess Your Plans?
Whilst a lot of businesses were poised to pull the trigger on their IR35 policies and procedures in 2020, I saw most organisations – financial services excluded – mothball their proposed changes until April 2021 (the date the government has now set for IR35 reforms to hit the private sector).
At the time, the delay in March 2020 was a direct response to the unprecedented and developing COVID-19 situation. It was a curious and perilous time; few could have predicted what would happen next, including country-by-country lockdowns, social distance policies, restricted travel, revamped offices and so on.
Now, in 2021, even as we see vaccines rolling out across the world, it’s clear that the way organisations get work done has indelibly changed. As much as I’ve been itching to get back to “normal”, I think that we can agree that “normal” has moved on irrespective of the course of the virus.
Like many working policies, IR35 was developed pre-pandemic. I was interested in how our new way of working may affect key IR35 determination factors and touch on my findings in this post.
How Has the Pandemic Affected Key IR35 Factors?
One of the consequences of the way organisations are working through this pandemic is how the answers to IR35 test questions may have changed. Let’s look at some of the main tests used by Her Majesty’s Revenue and Customs when determining IR35 status for assignments:
- Control and Direction – Does the business have control over what services the worker provides and how they provide them?
- Personal Service / Substitution – Is the worker required to carry the work out themselves without the option of sending someone in their place?
- Mutuality of Obligation – Is the business obliged to offer work to the worker? And is the worker obliged to accept it?
- Provision of Equipment – Does the business have to provide equipment to the worker in order to complete the work?
- Number of Clients – Is the worker only able to work for one client at a time?
- Basis of Payment – Does the worker take regular payment rather than a fixed project fee?
A “yes” for all the tests above would suggest that the worker is inside IR35, meaning they are considered, for tax purposes, an employee and are therefore subject to the Pay As You Earn (PAYE) deductions. On the other hand, if most of the answers are “no” then this implies the worker is engaged in a business-to-business type relationship with the client and would fall outside of IR35 (read more about inside/outside distinctions here).
However, the pandemic has brought a lot of changes in the way that we work, and it's easy to imagine how some of these tests could be affected by that. For example, before COVID-19, a lot of contractors may have worked at the client site and were virtually indistinguishable from employees in a lot of areas. But now, with home-based working, contractors are less likely to be under direct supervision or control. They’re also more likely to be using their own equipment at home. And that awkwardness of not being able to invite the contractors to company socials isn’t even an issue right now because there likely aren’t any events happening.
There will be instances where businesses that assessed their roles and requirements will now find that some of the requirements also change. Whether this is enough to modify a determination will, of course, depend on several factors. What it most certainly does mean is that roles should be re-assessed prior to reviewing a policy.
Are Further Delays to IR35 Expected?
2020’s last-minute delay to the off-payroll working reforms was a result of the government’s COVID-19 economic response package. The package included a wide range of economic support measures to help manage the fallout from the COVID-19 pandemic.
But, as lockdowns carried on into 2021, many of these measures were extended. If other tax measures, such as business rate reliefs and the deferral of VAT payments, have been extended, then perhaps there is a case for another delay to the IR35 implementation? The Recruitment and Employment Confederation seems to think so. They’ve been urging the government to delay the IR35 reforms in the private sector for another year.
We can’t be sure what’s going to be announced by the Chancellor of the Exchequer in the spring budget on March 3. However, despite the whispers of a possible delay getting louder and louder, the financial and reputational risks mean that it is simply too much of a gamble for businesses to not prepare for the reforms.