A top HM Treasury official has announced that reforms to the rules for off-payroll work scheduled to take effect April 6 will be postponed until 2021, marking a sharp reversal of the government's prior position.
According to Chief Secretary to the Treasury Stephen Barclay, the one-year delay is in response to the economic fallout from the coronavirus pandemic. In a March 17 address to the House of Commons, Barclay said the government has no plans to abandon its amendments to the tax compliance regime for independent contractors. Often referred to as “IR35,” the off-payroll rules are designed to establish tax parity between independent contractors and employees who perform substantially the same work.
The move is “a deferral, not a cancellation, and the government remains committed to reintroducing this policy,” according to Barclay, whose announcement contrasts with statements made by government officials the day before.
Appearing March 16 before the House of Lords’ Finance Bill Subcommittee, Lindsey Whyte, HM Treasury's director of personal tax, welfare, and pensions, defended the government's implementation timeline for changes in the tax collection rules for individuals subject to the off-payroll work regime. In February, the subcommittee was told that some U.K. business were unprepared, many others had taken no steps at all, and IR35 guidance has not been adequate.
One of the measures adopted by the United Kingdom’s 2020 budget shifts most administrative responsibility — including determining whether the rules apply and withholding employment tax — from individual contractors to their private employers. After a public consultation, Treasury concluded that transferring compliance duties to employers is necessary to address the “fundamental unfairness” of treating individual contractors and employees differently.
“Unfortunately, noncompliance with the off-payroll working rules is widespread and is forecast to cost the Exchequer over £1.3 billion a year by 2023-24 if not addressed. This is not sustainable,” the Treasury report says. “It denies the taxpayer significant revenue for essential public services and perpetuates an unfairness between two individuals working in the same way, but paying different levels of tax.”
According to Whyte, the burden of these changes is manageable for companies and many companies have already made the necessary changes.
“We received evidence that for a number of businesses who are well prepared for the reforms after many consultations and lots of engagement, that they would find it then harder not to proceed in some cases. But we are doing everything that we can in response to that review to smooth the implementation and to support individuals and businesses in operating the rules,” Whyte said.
However, subcommittee members, including chair Michael Forsyth, questioned whether the measure should be postponed in light of the coronavirus pandemic. While acknowledging HM Revenue & Customs' resource constraints, Forsyth argued that it would be “rather perverse to add an additional burden of this kind on business” when the reforms could easily be postponed by six to 12 months.
“We know from the evidence we're getting that large employers are responding to this by saying you've got to be [an employee] or you've got to come to us through a service company. And in both cases, the result of that is that the person who's actually doing the work finds that their income is substantially reduced,” Forsyth said. “And you're doing that at a time in the economy when their income is going to be substantially reduced because of what is happening.”
According to Whyte, other aid measures will be available to affected workers. “Within the wider coronavirus response package, there are a number of measures which will also provide support to all sort of small and niche businesses, for which some personal service companies will also potentially be eligible,” she said. In February, before the coronavirus spread to the United Kingdom and affected the global markets, 12 groups representing contractors and freelancers warned that the IR35 reforms were already having a catastrophic impact.
Whyte and Cerys McDonald, director of HMRC’s off-payroll reform program, also defended the government’s estimates of lost revenue. Pressed by subcommittee member Susan Kramer on whether the level of noncompliance is really high enough to warrant the measure, McDonald rejected the suggestion that these estimates were based on anecdotal evidence.
“That assessment has been based on our analysis of tax receipts, our analysis of tax return data, and, in addition, we've looked at evidence that we have from our frontline compliance staff. But also it's an assessment that we hear played back to us from stakeholders and businesses who observe noncompliance in their own supply chains,” McDonald said. “In the evidence that's been presented to this committee, and in the feedback that we've had in our numerous consultations on this, I haven't seen anyone argue strongly to the contrary.”
McDonald also argued that the reforms are among the types of measures that HMRC will need to effectively enforce the tax laws. “Yes, we are moving that responsibility up the supply chain to the end engager. But we would argue those organizations are better equipped to operate these rules, and do so correctly, than what we've seen to date. And that's what the evidence suggests,” she said.