The off-payroll working rules, commonly known as IR35, is a piece of legislation designed to ensure that individuals who, HMRC’s words “work like employees and pay broadly the same employment taxes as other employees, regardless of the structure they work through”.
It has been estimated that only 10% of Personal Services Companies that should be applying the IR35 legislation are currently. Under the current rules the responsibility for applying the correct tax treatment lies with the Personal Service Company
Public sector changes
In 2017, this responsibility was affectively transferred from Personal Service Companies operating in the public sector to the public sector body engaging the worker.
Where caught by these rules, the body engaging the worker now must deduct Taxes and National Insurance before paying the personal service company’s invoices, in a similar way to how PAYE works for employees. They must also pay employers National Insurance on these invoices at 13.8%.
The penalties for failing to deducted tax and pay NI for Personal Service Companies caught by these rules can lead to penalties of up to 100% of the Tax and NI due.
Whilst the government believe this approach is ensuring more people are paying the correct amount of tax, it has created an imbalance between the public sector and the private sector.
Extension to the private sector
In the 2018 Budget, the government announced its plans to extend these changes to medium and large companies in the private sector from April 2020, to address this imbalance and to ensure more people are paying the correct amount of tax. They believe this is set to potentially raise more than £3 billion between 2020 and 2024.
The government has announced, to lessen the burden on service users, the reforms will not apply to the smallest 1.5 million firms in the UK. Although there was no firm guidance on what criteria will be used to determine which business will qualify as small, it is expected to follow the Companies Act definitions of two of the following:
- Turnover less than £10.2 million.
- Balance sheet of not more than £5.1 million.
- Less than 50 employees.
As with the public sector, all medium and large businesses will have the responsibility of the deciding if contractors are caught by the off payroll worker rules or not and ensuring the correct amount of tax and National Insurances is paid over, if they are.
Following the changes introduced in the public sector in 2017 and after listening to responses from a consultation on rolling out these changes to the private sector the Government has decided to deferrer the implementation of these rules to 2020.
They have also announced a further consultation on the detailed operation of the reform to be published in the Sumer of 2019.
Lessons from the public sector
The deferral is to allow businesses time identify the potential impact to them and develop and implement systems and procedures to ensure compliance with these new rules.
One of the biggest issue the public sector bodies had in trying to comply with these rules in 2017 related to determining which contractors were caught by these rules and which were not. In March 2017 HMRC launched a tool called “Check Employment Status for Tax” (CEST), however this was found unreliable with a high proportion of check coming back as “unable to determine”.
This is why it was also announced in the budget that HMRC would be working closing with stakeholder to improve the CEST tool.
A number of workers have disagreed with the engaging body’s determination which has led to numerous disputes and workers leaving to work in the public sector. This has led to significant time being spent on mediation processes and recruitment.
Next steps for affect private sector businesses
Whilst the reforms will not take effect until April 2020, those likely to be affected should begin to consider in advance the actions they will need to take in response to the reforms and learn to the issues faced by the public sector.
Next steps for Personal Service Companies
Any individual working through a personal service company should take this opportunity to review their tax position on all contracts in place with their company and plan accordingly.
Apparently HMRC had 100 opening investigations into BBC related Personal Services Companies in October 2018. Some individuals caught up in these changes felt they were more likely to be investigated by HMRC where the BBC started to treat them as “employed”, but they had previously not been operating the IR35 legislation in their personal service company.
For further advice on off payroll worker changes, and the affect it is likely to have on businesses, please contact Ian Meaburn.