IR35 changes to go ahead amid COVID-19 outbreak

The Budget 2020 speech saw a flurry of announcements, ambitious deadlines and an overarching theme of ‘getting it done’. In what was his first Budget speech, the new Chancellor of the Exchequer, Rishi Sunak, outlined measures to protect the economy from the Coronavirus epidemic, resisted calls to scrap Entrepreneurs’ Relief and revealed plans to freeze Income Tax and VAT.

However, the issue that most contractors had been waiting for didn’t crop up in Sunak’s speech. The Chancellor failed to mention IR35, leaving the ‘Red Book’ to confirm that reform to the off-payroll working rules will be enforced on 6th April. This is despite mounting pressure from experts who urged the Government to rethink reform due to the Coronavirus epidemic. 

Budget confirms IR35 reform will be enforced

The official announcement, buried on page 88 of the Budget 2020 document, states: “At Budget 2018 the Government announced that it would reform the off-payroll working rules in the private and third sectors from April 2020. The Government has recently concluded a review of the reform and is making a number of changes to support its smooth and successful implementation. The Government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 and implemented on 6 April 2020, as previously announced.”

This shouldn’t come as a surprise to anyone familiar with the history of the off-payroll legislation, but for those still holding out hope for a delay, it’s certainly disappointing. IPSE, in reaction to the news, spoke on behalf of its contractor members: “By forging ahead with these disastrous changes, the Government risks hollowing out the UK contracting industry. Already, many companies across the UK have either declared all their contractors ‘inside IR35’ or scrapped their flexible workforce altogether.”

“Understandably, contractors are extremely concerned about this,” CEO Chris Bryce continues: “Many we have spoken to are already seeing work dry up almost entirely, and our research shows at least one in three are planning to stop contracting in the UK. This will be catastrophic for the £305bn contracting sector and will do serious harm to the already troubled economy.” 

To a large extent, Seb Maley, CEO of Qdos, shared Bryce’s view. He said: “IR35 reform is a needless, short-sighted tax grab from the Government. Given the alarming threat Coronavirus poses to the economy, this is not the time to introduce reform that has the potential to irreversibly damage the UK’s contractor workforce.”

Entrepreneurs’ Relief slashed and NI threshold increases

A handful of other measures that impact the contracting community were unveiled – the biggest of which were the changes to Entrepreneurs’ Relief and the National Insurance threshold. 

The lifetime allowance for Entrepreneurs’ Relief has been reduced from £10m to £1m. The current rate, which has been in place since 2008, means entrepreneurs pay 10% Capital Gains Tax on the sale of their business, costing the Government around £2.6bn a year. 

Some have criticised this as demoralising for those who have put in years of work building their business, but contractors – many of whom are considering closing their company due to IR35 reform – may see things differently, explained Victoria Kelly, Operations Director at Nixon Williams: “Despite coming under fire recently, Entrepreneurs’ Relief could prove extremely useful to many contractors in the coming months, particularly as IR35 may force some limited company owners to liquidate their businesses and choose an umbrella employment solution.”

The Chancellor also announced an increase to the National Insurance (NI) threshold, which will rise from £8,632 to £9,500. It means that around 31 million people will receive a tax cut worth £104 a year. Self-employed workers won’t benefit as much as employees, but should still average a saving of around £78 annually. 

National Chairman of the Federation of Small Business Mike Cherry said these announcements were decidedly pro-SME: “The sensible compromise on Entrepreneurs’ Relief is one that we have proposed, and championed, and everyday entrepreneurs will be pleased to hear the Chancellor say that he has listened to FSB on this.” 

However, Seb Maley said the Government isn’t supporting the self-employed: “Not scrapping Entrepreneurs’ Relief and increasing the National Insurance threshold doesn’t paper over the cracks. Given IR35 reform will go ahead, this Budget doesn’t work for freelancers and contractors who will be asking if this Government will ever deliver for the independent workforce.”

The full details of the Budget can be accessed on the Government website.