In the third of our short series of Reward and Employment Tax articles for the end of the 2020 year and heading towards the U.K. 21/22 tax year, it would be remiss not to mention “IR35”. 

Despite a motion to defer the off payroll working arrangements until at least 2023/24 and off the back of the Lords report into IR35, which was not very complimentary, the change in the rules for both the private and public sector are now within Finance Act 2020.  

All official messaging points to the rules still coming in for work performed from 6 April 2021 onwards. HMRC has started its communications campaign and is running a number of online sessions to educate engagers and contractors on the various aspects of the rules. This gives everyone impacted exactly 10 weeks from today to introduce the new rules.

So where does that leave Engagers? 
 
For medium and large businesses who started their internal IR35 review projects last year, they will know the level of work involved and how IR35 cuts across a number of business functions. Now is not the time to sit back and hope another function will take the lead. A joint approach is invaluable, so that various workstreams can run in parallel to make the most of the remaining time available.

Engagers may have reduced their dependency on contractors during the lockdown, as indeed with casual workers and permanent staff. Others may have seen an increase, e.g. as interim support, IT projects as the population of home worker numbers exploded, or in additional delivery drivers as online shopping increased.  

Many businesses are facing a huge mountain to climb in terms of recovery, and will be in a state of crisis management in the short term. This doesn’t leave much capacity to consider a strategic response to IR35 as part of a total review of manning and skills requirements for 21/22 and beyond. Engagers need to prioritise their limited resources to achieve what is necessary and build from there.  

The way in which individuals have been working for their engagers has already shifted due to the pandemic, and this presents opportunities to enter into revised arrangements, which promotes flexible and new ways of working. It could also produce some interesting CEST results for future engagements as certain badges of trade are eroded but others enhanced. Do you, therefore, rely on last year’s results, or start again this year with your contractor population you plan to use from April? 

Understanding what each party wants and expects from future arrangements will be key.

Where does that leave Contractors?

Contractors themselves may be facing the horns of a dilemma during the current crisis. Contractors’ ability to claim any support via the government schemes was restricted, and some contractors’ turnover is likely to have been heavily dented by the lockdown. Thus not generating the revenues, or distributable reserves from which dividends can be declared. Some contractors may also have seen an advantage in paying employee and employer NIC and ability to access the Coronavirus Job Retention Scheme. They may therefore be considering a long term switch to taking employment income from their businesses, rather than dividends, or seeking employment positions going forwards, for the security that provides. Is that what the engager wants though?

Others may have seen an increase in clients and their Personal Service Company’s turnover and could be even more keen to maintain their self-employed status, to not fall within IR35.

Where does that leave HMRC?

Due to the current economic environment, there are very few industries that can afford the additional red tape of compliance with the off payroll working rules. It is compliance heavy. Likewise, it is unlikely that many engagers will be able to bear the employer NIC and any associated apprenticeship levy costs for contractors found within IR35. This is likely to result in rate cuts to contractors and/or reliance on agencies and umbrella organisations, for a further fee. The economic forecasts of the extra tax yield from IR35 are therefore unlikely to materialise. 

The measures do however seek to “level the playing field” across the public sector and the private sector for medium and large enterprises. Something HMRC are keen to ensure happens.

It is a difficult balancing act when also trying to restore the economy and consumer confidence, along with trade deals with Europe and wider markets. The budget on 3 March will therefore present some enormous challenges and it is going to take a creative civil service, Chancellor and Parliament to navigate a path that meets our local needs whilst working within the global economic backdrop. The U.K. needs to remain competitive and an attractive place in which to do business whilst also preserving or improving living standards for its residents, and that is not a new dilemma. 

What is clear is that employment taxes will once again be the focus for the Treasury. Especially as the plan is to build our way out of recession; the employment status of workers across the construction industry, infrastructure and capital spend supply chains will need to be robust, but cost effective. 

How can Alvarez and Marsal help?

A&M has already assisted a number of clients in the preparation for the revised off payroll rules. We can bring that experience and wealth of knowledge to:

• help you kick off a project, 
• provide a project plan with the various workstreams clearly articulated, 
• act as a project manager to coordinate actions, if you do not have this resource in house, or they are working on other priorities,
• evaluate your contractor populations in the run up to April 2021, 
• determine their likely tax status, using our automated tools, 
• act as adjudicator in difficult cases or for appeals,
• work with you and contractors to reach decisions on how the rules will be implemented, and your policy position
• help with any necessary revisions to terms and conditions, processes and procedures 
• create a business as usual road map and identify areas that can be progressed during 21/22 tax year so it isn’t a “big bang” approach by 6 April.

Across our multi-disciplinary tax and wider A&M teams, we can provide cohesive, strategic and practical advice. Clients value our ability to be agile and move quickly to support their needs. Our U.K. team also has extensive in-house practical experience within organisations, so can help ensure all stakeholders’ needs are understood and met. Please contact your usual A&M point of contact or Louise Jenkins, Tracey Norton, Anita Eunson, Shirley Ly, or Linda Cameron for more information.