4 June 2018
The saga of IR35
Another chapter has opened in the saga of IR35, which began eight years ago. If you would like a résumé of the story so far, follow this link to our blog of 14 June 2016. Basically this relates to the taxation of personal service companies (PSC). These are a mechanism whereby a contractor who provides services to his client does so via a limited company in which he is usually the only shareholder and only employee, thus making it possible to save tax and national insurance by remunerating himself by a combination of salary and dividend. This is part of a very long-running debate over the differences between employment and self-employment.
As mentioned in our earlier blog, HMRC took the step in April 2017 to place the onus on employers in the public sector to decide in each case whether a contractor was genuinely self-employed or in reality an employee. If the latter he would be put on the payroll and have tax and national insurance deducted in the normal way, or be taxed under the provisions of IR35, which would have a similar effect.
The Autumn Budget Statement of November 2017 flagged up the government’s intention to extend this rule to companies in the private sector, but not immediately. It announced that before doing so it would instigate a formal consultation.
HMRC claims success in the public sector
On 18 May the consultation was launched. At the same time HMRC published the results of their analysis of the outcomes of the measures it had taken in April 2017 in the public sector. They observed that there was a problem with the length of time taken by HMRC to resolve enquiries, and another problem with recovering lost tax from PSCs, which often did not have the means to pay. They also stated that there was a perception among PSCs that any enquiry by HMRC had a low chance of success. As a result it claimed that there was ‘endemic non-compliance for ‘off-payroll’ engagements in the private sector.’
HMRC claimed that their analysis revealed that only 10% of PSCs were applying the rules correctly, and stressed the effectiveness of its public sector initiative, in that in the first 10 months of its operation, in any given month, 58,000 additional individuals working for public bodies were paying tax and NI.
The consultation proposes three options:
- To apply the public sector changes to the private sector.
- To encourage or require the end client to establish that all service provisions in its supply chain are compliant. This would mean seeking assurances from agencies that they are IR35 compliant, possibly supported by a confirmation from HMRC’s Check Employment Status tool.
- To require that end clients keep a clear record of contracts, provisions of service, shift patterns, and other relevant data to assist HMRC in any eventual enquiry.
HMRC have made it clear that they prefer option one.
More challenges for business and industry
There have already been unfavourable comments by various sectors of industry. Many regard this as another administrative burden. Others have expressed the point of view that the measure will be a constraint on the flexibility of the employment market, which is an important factor in encouraging foreign inward investment into the UK.
It was also thought that end clients, faced with a difficult decision, would err on the side of safety and apply IR35 as the default without properly investigating the circumstances. The HMRC Check Employment Status (CEST) has also come in for some criticism. However HMRC counters this by stating that it has been used about 750,000 times and gives a clear answer (self-employed or employed) in 85% of cases.
The consultation period ends on 8 August and it seems likely that this will lead to the private sector becoming subject to the public sector IR35 rules as early as April 2019. This could affect 12 month contracts that have already started.
Will this affect your business?
There are two business groups that are going to be seriously affected by this. First, if you provide your services via a personal service company, you should check your employment/self-employment status on the HMRC website. But don’t rely entirely on this. In our view an 85% likelihood of getting a clear answer is not good enough. Follow this up by talking to us or your usual UHY tax adviser.
Second, if you engage the services of contractors who operate via personal service companies or, more likely, purchase such services from an agency, you need to prepare for the inevitable change. The best way to start is by asking us to review your contracts with any such workers.