IR35 - changes are coming
21 May 2018
The long anticipated consultation on the reform of rules governing off-payroll working in the private sector, often referred to as IR35, has been published today. In addition, the Government has published the findings from an independent research project that looked at the immediate impacts on public sector bodies of implementing the reform of off-payroll working in the public sector.
The consultation pulls no punches in setting out the Government’s view on the current level of non-compliance with the tax rules for off-payroll workers in the private sector, and hence the need for reform. It states several times that HMRC estimates that only 10% of workers who should operate the IR35 rules currently do so. It estimates the costs of non-compliance in the private sector to currently be £700 million, with a projected increase to £1.2 billion by 2022/23. Overall, the consultation sets out a very stark picture of what it refers to as “endemic non-compliance for off-payroll engagements in the private sector”.
The document goes on to highlight the difficulties HMRC face in enforcing the current IR35 rules, with each Personal Service Company (PSC) having to be reviewed individually, each requiring separate data requests and meetings etc. All of this can take an extended time period and, even where the PSC is ultimately found to be liable for additional tax and NICs, collection can be a further challenge.
So what are the proposed solutions?
HMRC make clear that “the lead option” in addressing the above concerns is to extend the reforms which were introduced in the public sector in April 2017. This would make the “client”, i.e. the end user of the contractor’s services, responsible for assessing the contractor’s employment status. Whichever entity then pays the PSC, be that the client or an agency, will then be responsible for operating any appropriate PAYE/NIC withholding.
None of the findings from their independent research on the impact of the public sector changes have led HMRC to believe that the challenges of this approach would be insurmountable for the private sector. In fact, the clear impression is that Government feel the public sector changes have been an overall success.
Other options considered in the consultation include requiring businesses to secure their labour supply chains through the use of various checks, or requiring business to keep substantial records for any off-payroll engagements. Potential solutions which have been discounted outright include the use of a flat rate withholding for off payroll workers similar to the scheme used in the construction industry, or the introduction of an employer NIC charge for all clients using contractors.
The consultation closes on 10 August 2018, and it’s not clear how quickly any changes would be implemented. The consultation which dealt with the public sector reforms came out at a similar point in the year (May 2016) with a similar closing date (August 2016). Those changes then came into force the following April.
So should we expect any changes to apply from April 2019? Hopefully not. The new Budget timetable and policy making process previously announced by Government would suggest an April 2020 implementation date should be the earliest any changes come into force. This would seem sensible, and would give businesses the time required to understand the impact of any reforms and update their processes and systems.
The impact of these proposals should not be underestimated, and arguably represent the most significant changes to the operation of employment taxes for many years. There are immediate cost implications for businesses, largely driven by the employer NIC charge which, under the lead option being considered, would apply to any engagements deemed to be employment arrangements. Added to this, the operational challenges associated with the changes could be substantial. Organisations may have difficulty in identifying the off-payroll workers impacted by the changes, and then collating the information required to allow an informed determination of employment status to be made. Add to that the suggestion made in the Taylor Review and reflected in the seperate Employment Status consultation published in February, that those workers deemed to be employees under IR35 should also get access to wider employment rights, and you can start to see the broad impact these changes could have.
Whatever the outcome of the consultation, it seems clear the Government is set on reforming the rules to some extent and, whichever solution is chosen, there will be an increased compliance and administrative burden for businesses. A change is certainly coming…
Contact: Julian Sansum
Tel: 020 721 21652