The UK government is considering extending the current IR35 contractor regulations from the public to the private sector
Under the current rules, if an individual provides services to private sector clients through a personal service company (PSC), employment taxes must be paid if they would otherwise be regarded as an employee. This means that the income tax and national insurance contribution (NIC) liabilities fall on the PSC, not the client.
But Her Majesty’s Revenue & Customs (HMRC) has now said there is evidence that the legislation “is not working effectively, and non-compliance is widespread”, with only 10% of PSCs that should apply the legislation actually doing so.
According to Out-Law, in April 2017, the rules were changed for off-payroll working in the public sector, making public authorities responsible for determining the employment status of contractors engaged through PSCs or other intermediaries. They are now required to deduct income tax and employee NICs as well as account for employer NICs in respect of payments to PSCs, where the individual would have been considered an employee if engaged directly rather than through a PSC.
Following research commissioned by HMRC, the government believes that the public sector reform has been a success in terms of both increasing tax compliance and making it easier for tax authority to enforce the off-payroll working rules in the public sector. It is estimated that an additional £410 million (US$547 million) of income tax and NICs have been collected as a result of the reforms.
But the government is now asking for views on whether the reform’s design and implementation process could be improved. It is also seeking suggestions on measures to encourage or require businesses to help ensure that off-payroll workers are complying with current rules. Such measures could include requiring clients to carry out due diligence checks to assure the compliance of their labour supply chains.
No date has yet been set IR35 reform to come into force. The earliest date possible would be April 2019, but Ian Hyde, a tax expert at law firm Pinsent Masons, said that April 2020 was more likely.
"Even though we do not yet know what the government will decide to do, businesses need to consider the proposals now and take into account the possible implications for them, including increased NIC cost," he pointed out.
Moreover, Hyde added that in the case of many long-term projects, for example in the infrastructure sector, where businesses were operating as subcontractors, it made sense to “review their pricing to see if the additional costs can be passed on. Clearly live tenders should be reviewed to ensure the risk is priced in”, he said.
But there are also implications for past activities. “Switching off-payroll contractors to be on-payroll suggests that the individuals' PSCs should have been accounting for tax under IR35 for past periods," Hyde said. "There is no proposal for an amnesty for past tax IR35 irregularities and, whilst this is primarily as issue for the contractor, IR35 challenges can be significant brand issues."
The closing date for comments on the questions raised in the consultation document is 10 August 2018.
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
The UK government is considering extending the current IR35 contractor regulations from the public to the private sector
Under the current rules, if an individual provides services to private sector clients through a personal service company (PSC), employment taxes must be paid if they would otherwise be regarded as an employee. This means that the income tax and national insurance contribution (NIC) liabilities fall on the PSC, not the client.
But Her Majesty’s Revenue & Customs (HMRC) has now said there is evidence that the legislation “is not working effectively, and non-compliance is widespread”, with only 10% of PSCs that should apply the legislation actually doing so.
According to Out-Law, in April 2017, the rules were changed for off-payroll working in the public sector, making public authorities responsible for determining the employment status of contractors engaged through PSCs or other intermediaries. They are now required to deduct income tax and employee NICs as well as account for employer NICs in respect of payments to PSCs, where the individual would have been considered an employee if engaged directly rather than through a PSC.
Following research commissioned by HMRC, the government believes that the public sector reform has been a success in terms of both increasing tax compliance and making it easier for tax authority to enforce the off-payroll working rules in the public sector. It is estimated that an additional £410 million (US$547 million) of income tax and NICs have been collected as a result of the reforms.
But the government is now asking for views on whether the reform’s design and implementation process could be improved. It is also seeking suggestions on measures to encourage or require businesses to help ensure that off-payroll workers are complying with current rules. Such measures could include requiring clients to carry out due diligence checks to assure the compliance of their labour supply chains.
No date has yet been set IR35 reform to come into force. The earliest date possible would be April 2019, but Ian Hyde, a tax expert at law firm Pinsent Masons, said that April 2020 was more likely.
"Even though we do not yet know what the government will decide to do, businesses need to consider the proposals now and take into account the possible implications for them, including increased NIC cost," he pointed out.
Moreover, Hyde added that in the case of many long-term projects, for example in the infrastructure sector, where businesses were operating as subcontractors, it made sense to “review their pricing to see if the additional costs can be passed on. Clearly live tenders should be reviewed to ensure the risk is priced in”, he said.
But there are also implications for past activities. “Switching off-payroll contractors to be on-payroll suggests that the individuals' PSCs should have been accounting for tax under IR35 for past periods," Hyde said. "There is no proposal for an amnesty for past tax IR35 irregularities and, whilst this is primarily as issue for the contractor, IR35 challenges can be significant brand issues."
The closing date for comments on the questions raised in the consultation document is 10 August 2018.
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
