New tax charge for Covid-hit self-employed workers won’t be delayed
Self-employed contractors or freelancers can provide a service through their own limited company or another type of intermediary to a client rather than be an employee by the firm.
This kind of arrangement typically reduces the tax they pay and means HMRC treats them as ‘deemed employees’.
But the IR35 – or off-payroll working rules – which are due to come into effect in April 2021 mean this group will pay broadly the same tax and national insurance contributions as an employee.
See YourMoney.com’s Countdown to new IR35 tax charge for freelancers and contractors for more information.
A petition was launched last month calling on the delay to implement the IR35 legislation reform until Covid-19 had been resolved and it attracted nearly 14,000 signatures, triggering a response from the government on the matter.
‘Great deal of uncertainty and stress’
The petition stated: “Freelancers play a vital role in the UK economy and are the changing face of work. This petition requests the government to delay the implementation of the upcoming IR35 legislation until Covid-19 is eradicated and the economy recovers to a level where such a change can be better addressed by all.
“In an economy still wrestling with the pandemic, the planned implementation of IR35 in 2021 is causing a great deal of uncertainty and stress throughout the UK labour market. This threatens to put further strain on the wider economy looking to get back on its feet.
“As Covid is showing no real signs of abating, this petition asks to pause IR35 to a time when the economy can address the issues surrounding this legislation in a more singular fashion and from a position of strength.”
‘There will not be a further delay’
In its response, HM Treasury said the reform has already been delayed till April 2021 due to Covid-19 and the legislation has already received Royal Assent.
It read: “It is important to note that this change is about compliance with existing tax law, and is not a new tax. The existing off-payroll working rules, that have been in place since 2000, are designed to ensure that where two people are working in the same way, but one is directly employed and one is working through a company, broadly the same amount of tax is paid. The reform in the private and voluntary sectors will improve compliance with these rules by moving responsibility for determining whether the rules apply from the individual’s company to the client engaging them.
“The reform was originally announced at Budget 2018. Many businesses were prepared for the reform to be implemented in April 2020 as originally planned, and HMRC have undertaken a significant programme of education and support to ensure that large and medium-sized organisations are ready. Since the delay businesses have been putting in place preparations for April 2021, and another postponement would lead to uncertainty for businesses and potentially additional costs.”
The government added that further delaying implementation of these changes would also have other “very significant drawbacks” with non-compliance outside the public sector expected to cost £1.3bn per year by 2023/24 if not addressed.
“As well as the fiscal cost, delay would prolong the fundamental unfairness of taxing two people differently for the same work. Contractors are an important part of the UK economy and the government values their contribution. However, that should not mean that contractors should pay less tax than employees, when their engagement meets the tests of an employment relationship. Further delay would also extend the disparity between the private and voluntary sectors, and the public sector, where the reform has been in place since 2017.”
Millions of self-employed excluded from government Covid support
Amid the pandemic, the government has rolled out grant support schemes to millions of self-employed workers.
However, an army of three million are excluded from the financial help as they fail to meet the eligibility criteria. This includes the newly self-employed, small limited company directors and those whose profit makes up less than 50% of their self-employed earnings.
With no financial support from the government since March, many will also struggle once the new IR35 rules are implemented in April 2021.
Joanne Harris, technical commercial manager at SJD Accountancy, said: “It’s disappointing that the UK’s flexible workforce continue to fall between the cracks and with the extension of these schemes until March 2021, we are now looking at an entire year where appropriate government support has not been made available to them.
“The backdrop of IR35 changes are also looming and although there was a deferral this year until 6 April 2021, the government has always maintained that this was a deferral and not a cancellation, brought in to help businesses and individuals in light of Covid-19.
“More support is needed for end hirers and recruitment agencies around the upcoming changes to ensure businesses fully understand them and do not simply issue blanket bans on working with limited company contractors. The reforms are manageable, but there is a financial cost for businesses – one that many cannot afford to bear in what are very challenging times.”
Haris added that small limited company directors who have received little in support from the government, are now faced with the prospect of zero rights employment due to the introduction of the reforms to off-payroll working which could result in their businesses being forced to close.
“This will shrink the flexible contingent workforce at a time where they will be sorely needed by businesses as we seek to rebuild the UK economy.
“There is also a very real risk that those contractors in financial difficulties due to Covid-19 and forced to close due to the reforms will be tempted by tax avoidance scheme promotors, promising them higher take home pay. Ultimately, these contractors will face a hefty tax bill years down the line, as in the case of the Loan Charge. More must be done by the government to tackle the promotors of these schemes,” she said.