On 18th May 2018 the government published a long-expected IR35 consultation about ‘off-payroll working’ in the private sector. The consultation provides an evaluation of the off-payroll working rules introduced for the public sector in April 2017, off-payroll working rules for engagements in the private sector, and options for extending these to the private sector.
The government believes that employment legislation introduced in 2000 and designed to ensure those working through a PSC pay their ‘fair share’ of employment taxes, isn’t working.
There have been many high profile cases where HMRC has successfully argued that payments to workers via PSCs were ‘contrived’ to avoid the payment of PAYE and National Insurance taxes at source. The government started to address this in April 2017 when it introduced new rules for the public sector which meant that the PSC was no longer responsible for determining the status of its contracts for employment tax purposes. Instead, in the public sector, the end client became responsible for determining the status of such contracts.
The government believes the new rules in the public sector are working effectively. Its independent research concluded that over 58,000 more people are now paying income tax and NIC which means a gain to the Treasury of £410 million. By extending the rules to the private sector the government estimates an additional £1.2 billion of tax could be raised every year by 2022/23.
What options are proposed by the government?
The government is consulting on three options.
Option 1 – Extending the public sector reforms to the private sector
This is the government’s ‘lead option’. It believes that implementing the public sector rules and making the end client responsible for determining the status of contracts with PSCs will eliminate non-compliance and raise additional taxes.
The government recognises the approach in the public sector could be improved, and wants to ensure this happens before any changes are introduced for the private sector.
Option 2 – Encouraging or requiring businesses to secure their labour supply chains
The government is offering this option which expects businesses (the end client) to complete audits of their labour supply chains. Businesses will need to understand whether or not any workers supplied by PSCs (whether via an agency or not) are complying with IR35 rules.
Option 3 – Additional record keeping
The third option looks to place responsibilities on businesses (the end client) to hold records about the subcontractors they appoint. The business which makes the payment (directly or through an agency) to PSCs would need to retain certain information such as contracts, shift rotas, and line management reporting requirements relating to the engagement. This
would allow HMRC to gather such information directly from the business (end-client) should they later open an enquiry into one or more PSCs.
This option would require clear communication and exchange of detailed documentation between PSCs and their end clients – increasing administration costs.
What does Crunch think of the consultation?
It is clear the government is going to take action to strengthen the enforcement of off-payroll working in the private sector. Crunch notes the government’s conclusions about the experience of implementing the rules in the public sector and the additional tax receipts claimed.
Of the 3 options available, only Option 1 is realistic. Option 2 and Option 3 are complex to administer and will require additional resources for PSCs and their end clients to manage.
What the government doesn’t tell us in the consultation is how much the public sector has spent to establish arrangements to implement the new rules and to ensure compliance. Evidence from our own public sector clients shows that directors have been taking on PAYE assignments because their public sector client decided to stop contracting with PSCs.
In our view, it’s simply too early to conclude on the overall impact of the rules introduced for the public sector on PSCs.
It’s also the case that many public sector organisations have the capacity and expertise available to provide the resources necessary (manpower and systems and processes) to administer the new rules. Many private sector businesses simply don’t have the capacity to determine on a contract-by-contract basis whether IR35 rules apply or not.
HMRC also notes that the new rules will enable more investigations to be completed – and in a more efficient way – as it will be investigating the end client rather than individual PSCs. HMRC offers no independent evidence to support this position. It’s too early to say whether the arrangements in the public sector have resulted in a more streamlined and cost-effective investigation regime.
In our view, the industries and the type of assignments completed by contractors in the private sector are by nature more diverse and complex – which will mean longer and more resource heavy investigations for HMRC.
Private sector businesses will vigorously defend any enquiries started by HMRC and this will mean additional costs for HMRC and private sector business, with a longer timescale to complete investigations.
Our final observation is that PSCs will want to preserve the freedoms of running their own limited companies. At Crunch, we know it’s the freedom to choose who you work with and when you work, which persuades many people to take the plunge and set up their own limited company.
At the same time, many private sector businesses won’t be looking to employ people directly. Some end clients will simply place the burden of administering payroll onto agencies and Umbrella companies, which will, in our view, lead to higher rates charged per assignment.
Our “What is IR35?” hub is the place to head for all things IR35 – we have an independent IR35 Calculator tool to help you see if you’re at risk from IR35, a jargon-free IR35 business guide as well as articles explaining everything you need to know about IR35. For Crunch clients, we also have an IR35 service for those looking for our expert guidance.
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