9 July 2018
For as long as I can remember, the status of an individual for tax purposes is something that has been a hot topic, both for advisers in saving clients tax and NIC, and for HMRC in targeting such tax ‘avoidance’.
In very broad terms, the issue concerns whether an arrangement is one where there is a contract OF services or one involving a contract FOR services. The important distinction being that the former suggests a relationship between an employer and employee, whereas the latter arguably points towards a subcontractor acting in a self-employed capacity.
With the advent of the gig economy and recent court action taken by self-employed workers to secure employment rights, HMRC issued a Consultation Paper earlier this year on the wide ranging definition of ’employment status’. The period for comments closed earlier this month and we await with interest any announcements on new policy that could seek to align tax rules with employment law.
Added to the question of status, where the self-employed arrangement is provided through a company we have the much vaunted topic known as ‘off-payroll working’ to consider.
In 2000 HMRC introduced Iegislation colloquially known as the ‘IR35 provisions’ in an attempt to address what they believe to be significant tax leakage in this area. To illustrate the problem, HMRC believe there are several hundred thousand companies affected by these rules and yet it is estimated that only 10% of these taxpayers are complying with the HMRC rules, with the loss to the Exchequer of those operating in the private sector alone estimated to grow to over £1 billion in the next few years.
IR35 has had varying levels of success to date with some well publicised ‘wins’ in the Courts for HMRC and some less newsworthy wins for the taxpayer.
This is not perhaps surprising given the complexity and popularity of the personal service company and indeed the preference by the end client to engage individuals through a company rather than personally, with the hope of reducing their risk and transferring this to another entity.
A range of factors to consider have been established over the years, including whether the arrangement might involve:
- A mutuality of obligations
- A right of substitution
- Being in business on your account
- An element of control/direction, or just
- A financial risk.
However, none of these are definitive and each case is always looked at on a case by case basis. We are therefore left with the underlying principle of self-assessment under UK tax legislation.
With the ongoing uncertainty faced by those engaged in such arrangements and the perceived cost to the UK taxpayer, HMRC have continued to refine their guidance and have introduced an online tool to allow you to ‘Check your Employment Status for Tax’, known as CEST, which gives an indicator of HMRC’s view of the tax position or an arrangement. You can find this tool on the HMRC website here.
However, once again any conclusion is not binding and so we are therefore still left with the underlying principle of self-assessment under UK legislation.
In recent years, HMRC have decided to try again, and thus introduced legislation in April 2017 targeting off payroll working in the public sector. The broad premise is that, where applicable, the onus in now firmly placed at the door of the end user with deductions being required as if the relationship was that of an employer/employee – even if it isn’t legally documented as such.
The good news is that HMRC believe the new rules are working; their statistics suggest an extra 58,000 new employees working in public authority in last ten months alone. Buoyed by this success, a further Consultation Paper was released last month addressing the use of off payroll working in the private sector – this paper can be viewed here.
Responses and comments are due by 10 August 2018 and the likelihood is that whatever the responses received, new legislation will surely follow in the next year. We therefore strongly recommend that you undertake a review of all consultancy or self-employed arrangements as soon as possible. For advice on how to do this, or to discuss this blog further, contact me or your local UHY adviser.
Alternatively, fill out our contact form here.