On 27 February 2020 HM Treasury confirmed that the planned changes to the IR35 rules will be implemented from 6 April 2020. The IR35 off-payroll labour rules were introduced in response to perceived tax avoidance by individuals providing services through an intermediary such as a service company. The rules apply to adjust the tax charge in situations where the individual providing services would be an employee of the business receiving the services if the intermediary company was not being used.

From 6 April 2020 the IR35 rules are being amended to transfer the responsibility from contractors to large and medium companies to determine if the IR35 rules apply in a particular situation.

Under the changes the company receiving services will become responsible for determining the tax status of off-payroll workers whose services are provided through limited companies. The rules apply to all businesses except those with fewer than 50 employees or annual turnover under GBP 10.2 million. The changes are expected to impact sectors such as financial services and construction that rely on services provided by contractors.

However HMRC is not intending to administer the reforms in a heavy handed manner and intends to ensure a seamless transition to the new rules. In particular, businesses will not be charged penalties for incorrectly assessing the employment status of a freelance contractor in the first year in which the revised rules apply. This concession only apples to the penalties that would be chargeable and does not affect the requirement to pay additional tax due to the incorrect determination under IR35.

Changes to the taxation of a contractor will not be applied retrospectively to previous tax years unless HMRC suspects fraud or other criminal activity.

The rules apply to all businesses except those with fewer than 50 employees or annual turnover under GBP 10.2 million.

HM Treasury has suggested that if this amendment is not made to the IR35 rules the government would be losing GBP 1.3 billion in tax revenue annually by 2023. According to an estimate by HMRC only around 10% of private sector contractors subject to the current IR35 rules are paying tax correctly.