Controversial proposals for reforming the tax rules for those working for private sector businesses through intermediaries such as personal service companies (PSCs) were published last week (18 May 2018). The new rules could impact many thousands of people working through intermediaries, such as PSCs, as well as the companies that use their services.
The original off-payroll working rules (known as IR35) were introduced in 2000 to ensure that those who choose to work through a personal service company (PSC), who would have been employees if they were directly engaged, should pay broadly the same in employment taxes as if they were employed. However, HMRC contends that non-compliance is widespread and estimates that only 10 per cent of PSCs that should apply the legislation actually do so. The cost of this non-compliance in the private sector is estimated to increase to £1.2bn by 2022/23 – highlighting the significance of this to the Government.
From April 2017, the Government sought to address non-compliance with the IR35 rules in the public sector by shifting the responsibility for assessing whether or not the rules apply on to the end-user of the services. Where these rules apply, then the fee payer is also responsible for accounting for and paying tax and NIC (including employer NIC) to HMRC.
HMRC’s analysis has found that in any given month since the public sector reforms were introduced, there were an estimated 58,000 extra individuals paying income tax and NICs. This has resulted in an additional £410m of income tax and NICs being paid since the public sector reforms were introduced.
Buoyed by the success of the recent public sector reforms, the consultation to address non-compliance with the IR35 rules in the private sector is not unexpected. In terms of options for change, the obvious, and most likely solution proposed in the consultation is the extension of the public sector reforms to the private sector.
However, this could present a number of challenges for the private sector. For example, it would be necessary to introduce new processes and potentially engage additional resource, to assess existing and proposed engagements. Changes to accounting and payroll systems would be required and budgeting would need to be reviewed because of the potential additional costs where an arrangement is found to be within the rules.
The consultation document also includes other options for change including the possibility of requiring the end user of the services to undertake checks and provide assurances on the compliance of their labour supply chains that are used to source off payroll workers.
There will undoubtedly be considerable opposition to these proposed reforms from companies in the private sector as significant additional administration costs; changes to systems; and the need to assess risk management is the last thing businesses need.
However, HMRC is determined to push ahead with this reform as it believes the non-compliance is prevalent in the private sector and will be calling for responses from stakeholders between May and July to help shape the final proposals. Change seems inevitable and businesses should not underestimate the time that would be needed to get ready for the change as and when it comes.
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