On the 5th March, the Government published their long awaited policy and consultation document on proposed reforms to the off-payroll working rules (known as IR35) for medium and large businesses working in the private sector to take effect from 6th April 2020.
This will affect hundreds of thousands of UK taxpayers who work on contracts for large companies (end clients), often enrolled through an agency, and who operate through their own personal service company (PSC).
Governments have long targeted these taxpayers and contracts as they perceive these to be paying less tax than their employed counterparts paying tax and NI through PAYE.
In the early 2000s detailed regulations, known as IR35, were introduced where a worker provides their services to a client through an intermediary (such as a personal service company) and, but for the existence of the intermediary, the worker would be an employee of the end client. Where this is the case, the personal service company is deemed to make a payment to the worker which is liable to income tax and class 1 National Insurance. The Government, through the imposition of the deemed payment, had hoped to level the playing field, compensating the Exchequer for the ‘lost’ employment taxes.
IR35 has, however, failed to have the effect that the Government had hoped for. The reason for that is that under IR35 it fell to the PSC to determine whether or not the contract fell within the rules or not. HMRC also have had great difficulty in enforcing their rules when challenged in tribunal and case law.
With effect from 6th April 2017 new rules were introduced where the end-client is a public-sector body, under which the responsibility of deciding whether the rules (as amended) applied was switched from the intermediary to the public-sector body. Now, where, but for the intermediary, the worker would be an employee of the public-sector body, as determined by the public-sector body, the fee payer - which may be the public-sector body or a third party - must deduct tax and National Insurance from payments made to the intermediary. Shifting the responsibility for applying the rules up the chain to the public-sector body makes it easier to police. HMRC can now investigate one public sector body rather than large number of contractors.
The latest rules announced this month seek to impose the responsibility of determining whether or not contracts fall to be within IR35 on to the medium and large companies within the private sector who are the end users. Those companies will now have to set in place detailed procedures to determine the nature of contracts, and can expect those procedures, as well as specific contracts, to be investigated by HMRC.
The reaction of these private sector end users will no doubt have a major impact on all contracts worked on from 6th April 2020, and the working practices of those hundreds of thousands of taxpayers will be fundamentally changed.