What will extending off-payroll tax rules to the UK private sector mean? What will extending off-payroll tax rules to the UK private sector mean?

What will extending off-payroll tax rules to the UK private sector mean?
28 Jun 2018

IR35, or the UK’s so-called intermediaries legislation which was introduced in 2000, is designed to ensure that ‘disguised employees’, for example those who provide their services through a personal services company (PSC) are taxed in broadly the same way as employees.

But over recent years, the UK Government has become increasingly concerned that individuals are using these PSCs inappropriately in order to reduce their tax bill. In other words, they are treating themselves as self-employed rather than as employees because it is tax beneficial to do so.

Since April 2017, in the case of workers who provide their services mainly to public sector organisations through a PSC, the responsibility for operating IR35 under ‘off-payroll working rules’ has fallen to the body paying the PSC rather than the PSC itself. But during the 2017 Autumn Budget, the Government announced it would consult on how to tackle non-compliance with off-payroll working rules in the private sector. This consultation has now been launched and will run until 10 August 2018.

The consultation is something to which all UK board members, payroll, HR and finance professionals should pay attention as there will likely be huge implications for private sector companies. Indeed, Her Majesty’s Revenue & Customs (HMRC) has made it clear that, in its view, there is evidence that IR35 legislation "is not working effectively, and non-compliance is widespread".

For instance, it is estimated that only 10% of the PSCs that should apply the legislation actually do so. Tax losses from non-compliance are also expected to grow from £700 million (US$929 million) to £1.2 billion (US$1.5 billion) in five years, which represents an increase of 71%.

To break these figures down a bit, the yield from public sector bodies is estimated to have increased to £410 million (US$544 million) from 58,000 ‘engagements’, which is equivalent to just over £7,000 (US$9,292) from each. If similar figures were applied to the private sector, it would mean that for the £700 million yield figure to hold true, almost 100,000 disguised employments must exist. But this figure would have to grow to nearly 170,000 to correspond with a projected yield of £1.2 billion in five years.

What are the rules for off-payroll working in the public sector?

The main requirements for the public sector are to:

  • Identify contracts in which personal services are provided by workers;
  • Carry out a status review and notify the supplier (agency, PSC etc) if:
    • Workers would be regarded as employees for income tax purposes if they had entered into a contract directly with the public authority;
    • Workers are office holders and their services relate to that office;
    • The rules do not apply to this particular engagement.
  • Undertake a status review if paying directly and deduct tax and national insurance contributions (NICs), if appropriate, to payments made after 6 April 2017;
  • Take reasonable care in arriving at a decision on status;
  • Respond to any requests from a supplier within 31 days or any potential liability could pass to the public authority or charity on the Freedom of Information Act list

What did recent Government research say about the public sector rules?

To address concerns about the potential impact of the reforms, HMRC commissioned independent research from IFF Research and Frontier Economics, which makes for interesting reading. Around half of the public authorities questioned said they found complying with the rules easy. But many already had processes in place to report to Government on off-payroll workers, which is not true of the private sector.

The report also goes on to state that a considerable proportion of those surveyed had early difficulties in complying with the requirements, largely due to issues in familiarising themselves with the new rules for HMRC’s Check Employment Status for Tax (CEST) service and in resolving disputes with workers and agencies. To clarify, the CEST service has been used more than 750,000 times, and HMRC’s latest figures show that it assigns ‘self-employed’ status around 60% of the time and ‘employed’ around 40% (based on February 2018 data).

As HMRC says: "The available evidence shows that the public sector reform has been effective in tackling non-compliance with the off-payroll working rules”, which means we can certainly expect to see change.

What options are provided in the consultation document?

The consultation document, which comprises a total of 34 questions and is split into various areas, sets out three different options:

  1. Extending the current public sector off-payroll rules to everyone;
  2. Requiring businesses to ensure that the off-payroll workers provided to them comply with IR35. This is effectively a labour supply chain check and could include requiring employers to ask PSCs to provide a completed CEST determination, which is available from the HMRC digital service. It could also include naming and shaming companies that do not comply;
  3. Demanding that organisations making payments to PSCs whether directly or indirectly retain background information relating to engagements such as contracts, shift details and line management reporting requirements. It could be necessary to provide such information to HMRC if it opens an inquiry and penalties could be imposed if such data is not gathered, retained or reported.

Whichever option is selected in the end, it will clearly be a case of when, rather than if, new regulations are introduced, with April 2019 currently looking like the most likely date to do so. While nothing is certain, the timing of the consultation would appear to be important as it is running from 18 May until 10 August 2018. This leaves plenty of time for the Government to respond to it in November’s 2018 Autumn Budget, with a new Finance Bill likely to lay out an April 2019 implementation date.

It is also clear that the Government has already decided that it prefers the first option – and without a coordinated response from the private sector, it is unlikely to change its view. This means that responding to the consultation is very important for those likely to be affected.

What should employers do in the interim?

No matter which option is eventually selected, it is likely to be introduced in a relatively short timeframe. As a result, employers should:

  • Review their current off-payroll processes. If none are in place, it is better to get a headstart by introducing them immediately, before the regulations come into force;
  • Respond to the consultation. The closing date for comments is 10 August 2018 so there is time yet;
  • Keep an eye out for future developments in the press, or during major announcements such as the Budget in November;
  • Consider specialist advice if there is any uncertainty about the status of your workforce.

In order to introduce new procedures to deal with this possible legislative extension, it will be necessary to involve a number of key stakeholders across the organisation such as payroll, HR, finance, legal and procurement. They will need to:

  • Identify people who currently work through intermediaries;
  • Review the company’s processes for determining if individuals are employed or self-employed;
  • Evaluate procurement processes to consider what impact they have;
  • Assess engagement processes that are not dealt with through procurement;
  • Amend systems, process maps, internal guidance, contracts and policies to demonstrate that reasonable care has been exercised;
  • Keep a clear audit trail to present to HMRC in the event of a review;
  • Work out the costs of introducing the proposed changes into existing and future contracts and consider renegotiating rates to make up for any shortfall.

But above everything else, start planning now as to do so will undoubtedly make things easier in the long run.

 Susan Ball

Susan Ball is partner at Crowe Clark Whitehill LLP and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

IR35, or the UK’s so-called intermediaries legislation which was introduced in 2000, is designed to ensure that ‘disguised employees’, for example those who provide their services through a personal services company (PSC) are taxed in broadly the same way as employees.

But over recent years, the UK Government has become increasingly concerned that individuals are using these PSCs inappropriately in order to reduce their tax bill. In other words, they are treating themselves as self-employed rather than as employees because it is tax beneficial to do so.

Since April 2017, in the case of workers who provide their services mainly to public sector organisations through a PSC, the responsibility for operating IR35 under ‘off-payroll working rules’ has fallen to the body paying the PSC rather than the PSC itself. But during the 2017 Autumn Budget, the Government announced it would consult on how to tackle non-compliance with off-payroll working rules in the private sector. This consultation has now been launched and will run until 10 August 2018.

The consultation is something to which all UK board members, payroll, HR and finance professionals should pay attention as there will likely be huge implications for private sector companies. Indeed, Her Majesty’s Revenue & Customs (HMRC) has made it clear that, in its view, there is evidence that IR35 legislation "is not working effectively, and non-compliance is widespread".

For instance, it is estimated that only 10% of the PSCs that should apply the legislation actually do so. Tax losses from non-compliance are also expected to grow from £700 million (US$929 million) to £1.2 billion (US$1.5 billion) in five years, which represents an increase of 71%.

To break these figures down a bit, the yield from public sector bodies is estimated to have increased to £410 million (US$544 million) from 58,000 ‘engagements’, which is equivalent to just over £7,000 (US$9,292) from each. If similar figures were applied to the private sector, it would mean that for the £700 million yield figure to hold true, almost 100,000 disguised employments must exist. But this figure would have to grow to nearly 170,000 to correspond with a projected yield of £1.2 billion in five years.

What are the rules for off-payroll working in the public sector?

The main requirements for the public sector are to:

  • Identify contracts in which personal services are provided by workers;
  • Carry out a status review and notify the supplier (agency, PSC etc) if:
    • Workers would be regarded as employees for income tax purposes if they had entered into a contract directly with the public authority;
    • Workers are office holders and their services relate to that office;
    • The rules do not apply to this particular engagement.
  • Undertake a status review if paying directly and deduct tax and national insurance contributions (NICs), if appropriate, to payments made after 6 April 2017;
  • Take reasonable care in arriving at a decision on status;
  • Respond to any requests from a supplier within 31 days or any potential liability could pass to the public authority or charity on the Freedom of Information Act list

What did recent Government research say about the public sector rules?

To address concerns about the potential impact of the reforms, HMRC commissioned independent research from IFF Research and Frontier Economics, which makes for interesting reading. Around half of the public authorities questioned said they found complying with the rules easy. But many already had processes in place to report to Government on off-payroll workers, which is not true of the private sector.

The report also goes on to state that a considerable proportion of those surveyed had early difficulties in complying with the requirements, largely due to issues in familiarising themselves with the new rules for HMRC’s Check Employment Status for Tax (CEST) service and in resolving disputes with workers and agencies. To clarify, the CEST service has been used more than 750,000 times, and HMRC’s latest figures show that it assigns ‘self-employed’ status around 60% of the time and ‘employed’ around 40% (based on February 2018 data).

As HMRC says: "The available evidence shows that the public sector reform has been effective in tackling non-compliance with the off-payroll working rules”, which means we can certainly expect to see change.

What options are provided in the consultation document?

The consultation document, which comprises a total of 34 questions and is split into various areas, sets out three different options:

  1. Extending the current public sector off-payroll rules to everyone;
  2. Requiring businesses to ensure that the off-payroll workers provided to them comply with IR35. This is effectively a labour supply chain check and could include requiring employers to ask PSCs to provide a completed CEST determination, which is available from the HMRC digital service. It could also include naming and shaming companies that do not comply;
  3. Demanding that organisations making payments to PSCs whether directly or indirectly retain background information relating to engagements such as contracts, shift details and line management reporting requirements. It could be necessary to provide such information to HMRC if it opens an inquiry and penalties could be imposed if such data is not gathered, retained or reported.

Whichever option is selected in the end, it will clearly be a case of when, rather than if, new regulations are introduced, with April 2019 currently looking like the most likely date to do so. While nothing is certain, the timing of the consultation would appear to be important as it is running from 18 May until 10 August 2018. This leaves plenty of time for the Government to respond to it in November’s 2018 Autumn Budget, with a new Finance Bill likely to lay out an April 2019 implementation date.

It is also clear that the Government has already decided that it prefers the first option – and without a coordinated response from the private sector, it is unlikely to change its view. This means that responding to the consultation is very important for those likely to be affected.

What should employers do in the interim?

No matter which option is eventually selected, it is likely to be introduced in a relatively short timeframe. As a result, employers should:

  • Review their current off-payroll processes. If none are in place, it is better to get a headstart by introducing them immediately, before the regulations come into force;
  • Respond to the consultation. The closing date for comments is 10 August 2018 so there is time yet;
  • Keep an eye out for future developments in the press, or during major announcements such as the Budget in November;
  • Consider specialist advice if there is any uncertainty about the status of your workforce.

In order to introduce new procedures to deal with this possible legislative extension, it will be necessary to involve a number of key stakeholders across the organisation such as payroll, HR, finance, legal and procurement. They will need to:

  • Identify people who currently work through intermediaries;
  • Review the company’s processes for determining if individuals are employed or self-employed;
  • Evaluate procurement processes to consider what impact they have;
  • Assess engagement processes that are not dealt with through procurement;
  • Amend systems, process maps, internal guidance, contracts and policies to demonstrate that reasonable care has been exercised;
  • Keep a clear audit trail to present to HMRC in the event of a review;
  • Work out the costs of introducing the proposed changes into existing and future contracts and consider renegotiating rates to make up for any shortfall.

But above everything else, start planning now as to do so will undoubtedly make things easier in the long run.

 Susan Ball

Susan Ball is partner at Crowe Clark Whitehill LLP and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.