A delay to your social plans, a delay to the sporting calendar and now a delay to IR35. The government has confirmed it will defer the introduction of IR35 for private sector contractors by a year in response to the ongoing crisis relating to the coronavirus outbreak (COVID-19).
In this post, we’ll explore how the virus has affected contractors and how the IR35 delay could ease things slightly.
Coronavirus crisis
Things have changed pretty rapidly since the first UK case of coronavirus was confirmed at the end of January. There are now thousands of cases across the country, with over a thousand deaths. After criticism for a lack of response, the UK government finally announced a lockdown on 23rd March.
Amongst other measures, that meant no social events and public gatherings. The public were instructed to stay at home other than essential trips to buy food, collect medicine or take one form of outdoor exercise per day – and stay 2 metres apart from other people when doing so.
On top of that, non-essential workplaces were instructed to close or allow staff to work from home. The only exception to this are key workers, including:
- Healthcare workers and supply chain staff
- Education and childcare staff
- Anyone involved in the production, processing, distribution, sale and delivery of food products
- Key public services including bin collectors and postal workers
- Local and national government
- Utility workers keeping oil, gas, electricity and water in order
- Public safety staff, including police, prison and probation workers
The impact on contractors
Alongside the lockdown measures, the UK Government announced support to help businesses shut down temporarily. Employers can keep staff on the payroll while they halt operations, with 80% of their wages covered by a new Government scheme – up to the value of £2,500 per month.
Unfortunately, that scheme didn’t include self-employed workers. They were faced with a choice between self-isolation with no financial support other than universal credit, or continuing work against government advice and putting their health at risk.
Eventually, the Government announced a financial aid package for the self-employed, where income would be covered based on previous tax returns of up to three years, calculating an average monthly wage. However, it was also revealed that the financial aid wouldn’t be available until June.
IR35 adding to worries
Amongst all the confusion and anxiety, contractors had to consider the looming uncertainty of IR35. Introduced for public sector contractors in 2017, IR35 aims to crack down on tax avoidance by contractors who are ‘disguised employees’.
Put simply, this is where companies hire employees on a self-employed basis. In doing so, they sidestep employer’s National Insurance contributions and the provision of statutory rights like sick pay and paid holidays.
The employees can also minimise their tax payments by working through an intermediary. Rather than paying tax through pay-as-you-earn, that can set up their own limited company and take their salary as dividends or taxable profit, paying corporation tax at a lower rate.
Already in place in the public sector, the legislation was due to be extended to private sector firms and contractors from April 2020. With lots of contractors still operating this way to maximise income and compensate for a lack of support, many have been hoping for an IR35 delay for two years since the reforms were announced in the 2018 budget.
IR35 delay
Fortunately, those prayers have been answered, with the Government confirming an IR35 delay. On 18th March 2020, Financial Secretary to the Treasury Jesse Norman confirmed, “As well as the current support measures we have announced, we have delayed the off-payroll working reforms to April 2021.”
That gives contractors an extra 12 months to prepare for the changes, which could have had a serious impact on the work available to contractors. With companies themselves liable for any non-compliance with IR35, the public sector introduction saw many contractors laid off immediately. Needless to say, the Government wanted to avoid such a situation in the midst of a global pandemic.
What’s next for contractors?
Even with the IR35 delay, many contractors will be considering their future given the huge amount of ambiguity and confusion during the coronavirus outbreak. Contractors had to wait four days following the initial lockdown announcement, only to find that they could have to wait another three months before receiving financial aid.
On top of that, the IR35 delay means they will still have to face a change of rules in a year’s time. For some contractors, that could even tip the balance in favour of returning to full-time employment. After all, they will have to pay tax through PAYE but still won’t receive the statutory benefits that their full-time colleagues are entitled to.
How can an umbrella company help?
Amidst all the panic and uncertainty, there are some contractors that haven’t been left unsure of their future. Namely, those working through an umbrella company. First and foremost, these contractors are classed as employees for their umbrella company. That means IR35 doesn’t apply to them, so they weren’t reliant on an IR35 delay to maintain normality.
On top of that, the company takes care of their payroll and tax, taking a huge administrative burden off their plate. They also provide statutory benefits like holiday pay, maternity or paternity pay and, crucially, sick pay.
In the current situation, that means umbrella company contractors will at least have the reassurance of statutory sick pay if they can’t work. However, umbrella companies may also be able to apply for support for furloughed workers, covering 80% of contractors’ wages while they self-isolate.
