Controversial proposals for reforming the tax rules for those working for private sector businesses through intermediaries such as personal service companies (PSCs) were published in a consultation today. The new rules could affect many thousands of people working through intermediaries such as PSCs, as well as the companies that engage them.
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, pay broadly the same 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 legislation has, until recently, required the individual working through a PSC to determine whether or not the rules apply depending on whether the engagement has the features of employment.
However, in April 2017, the government reformed the rules for off-payroll workers in the public sector only. Since then, public authorities have been responsible for determining whether the worker would have been regarded for income tax and NICs purposes as employees if they were engaged directly. They also made the public authority or the third party that pays the PSC, responsible for accounting for and paying income tax and NICs (including employer NIC) under PAYE to HMRC, on behalf of the worker.
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.
David Williams-Richardson, employer solutions partner at RSM said: ‘HMRC is determined to push ahead with this reform as it believes the costs of non-compliance in the private sector will increase from £700m in 2017/18 to £1.2bn in 2022/23. The taxman will also be buoyed by the success of the recent public sector reforms in bringing in much-needed extra revenue.
‘There will undoubtedly be considerable opposition to these proposed reforms from companies in the private sector who would face significant additional administration costs, changes to systems and the need to assess risk management. Depending on the outcome of the consultation, businesses should not underestimate the time that would be needed to get ready for the change.
‘If experience with the public sector reforms are anything to go by, many personal service companies working for private sector businesses may find that the engager takes an ultra-cautious view and assumes that the engagement is caught resulting in National Insurance contributions and tax being withheld through PAYE.’