Are off-payroll rules coming to the private sector?
Jun 07, 2018
In March we published an article on the implications of employing contract workers, in light of a recent consultation on employment status. At the same time a related discussion has been hotting up on the topic of “off-payroll” workers. On 18 May 2018 the government launched a consultation on whether IR35 rules, which currently apply to off-payroll workers in the public sector, should be extended to the private sector as well.
The IR35 rules introduced in 2000 are intended to ensure that people working through a Personal Service Company (PSC), who would have been employees had they been engaged directly, pay broadly the same Income Tax and National Insurance Contributions (NICs) as if they were employed. However, HMRC estimates that only 10% of private sectors individuals working in this way apply the rules properly, which costs the Exchequer hundreds of millions of pounds in lost tax revenues every year.
Do off-payroll rules work in the public sector?
In April 2017, the Government reformed the rules for engagements in the public sector, and early indications are that this has resulted in an increase in public sector compliance. The April 2017 change requires the public sector body or agency, not the worker, to decide whether or not the IR35 rules apply and then deduct Income Tax and National Insurance from payments to the worker.
However there are concerns that many such workers are being treated as quasi-employees incorrectly. The consultation document states that there is evidence that some public authorities had difficulties implementing the reform, both in understanding the new rules and in resolving disputes with contractors.
HMRC has introduced a software tool on their website called the Check Employment Status for Tax service (CEST). This is designed to help employers to review their workers’ contracts, but HMRC has come under fire recently after it emerged that the CEST tool wrongly taxed thousands of contractors. Many public sector bodies have ignored the results of CEST, which may have led to further inaccuracies in the amounts of tax and NI deducted from contractors.
Options being considered for the private sector
As well as the possible extension of the off-payroll rules that currently apply to the public sector, the consultation is requesting views on other options.
One alternative would be to require engagers to assess the labour providers in their supply chain, to ensure they’re compliant with employment and tax laws. This is already a requirement for gangmasters and other labour providers.
Another suggestion apparently rejected was to create a new corporate structure referred to as a “freelance limited company”, that would offer a simplified tax treatment, limited liability, restricted dividend payments and a requirement for the worker to be paid a minimum salary.
Another proposal rejected was to introduce a flat-rate tax at source for off-payroll engagements, similar to the Construction Industry Scheme.
Fears over the private sector roll-out
The reaction amongst the contractor industry to the private sector proposals has been far from positive. There are fears that if the rules aren’t yet working properly in the public sector, then the roll-out could cause further confusion. The feeling is that HMRC can’t be trusted to ensure the private sector accurately assesses employment status – and in fact the consultation was launched only a day after an IT contractor successfully won his appeal against HMRC on IR35.
There is also likely to be significant opposition to the proposals from private sector companies who anticipate increased administration costs and system changes.
Despite any opposition, HMRC will no doubt be determined to push ahead with this reform due to the increased revenue it promises. The consultation period ends in August and it is anticipated that the Chancellor will make an announcement about future proposals in the Autumn Budget.