The UK Government has announced that, with effect from April 2020, it will be reforming the tax off-payroll working rules that currently apply to the private sector (commonly known as IR35) to increase compliance and to bring them into line with changes made for public sector engagements in April 2017.
What is IR35 and what is changing?
The IR35 rules apply where an individual provides their services via an intermediary (typically a personal service company they have set up) in circumstances where, had they been engaged directly, they would have been an employee of the client to whom they are providing their services. It is the responsibility of the individual’s personal service company to determine the application of the rules and, where they apply, PAYE and national insurance liabilities are imposed on the personal service company.
Changes were made to the application of the IR35 rules to public sector engagements in April 2017, moving responsibility for applying the rules away from the individual’s personal service company to the client receiving the benefit of the individual’s services (or, where there are agencies or other third parties involved in the supply chain, to the third party paying the individual’s personal service company). As a result of those changes, public authorities are now responsible for determining whether an individual is a “disguised employee” and if so, for operating PAYE and accounting for income tax and national insurance contributions on the payments made to the individual’s personal service company.
The government has confirmed that, save for the smallest 1.5 million businesses (to which the current IR35 regime will continue to apply), these public sector reforms will be extended to the private sector with effect from April 2020.
What will this mean?
Whilst the precise details of the private sector reforms are still to be confirmed, at their most basic level they will mean that businesses in the private sector that are directly or indirectly contracting with personal service companies will now have to actively consider and apply the IR35 rules.
Consideration will need to be given to the increased costs this will entail. These will include employer’s national insurance contributions and the apprenticeship levy, together with associated administrative costs. It is also likely that many contractors will seek to recover any reduction in their take-home pay as a result of the application of PAYE through an increase in their rates, whilst agencies will similarly look to pass on their additional costs in order to maintain their profit margins.
If the tax benefits of contractor status are removed it is also possible that some contractors will re-assess their preferred engagement model. Whilst the reforms will only result in employment status for tax purposes (there are other consultations taking place which are considering the issue of employment status more generally), it is likely that many affected individuals will then look for the wider benefits and protections that employment status bestows through direct engagement as an employee. The financial and operational consequences that this would give rise to will therefore also need to be considered.
What should you do?
In contrast to the public sector reforms, the government has provided a reasonable lead time before the private sector changes go live, in recognition of the need for businesses to carry out reviews and put in place the necessary compliance systems. It is therefore important that businesses take advantage of this lead-in time.
Businesses should establish how many of their contractors are currently engaged, directly or indirectly, through a personal service company, and how many of those contractor roles would (or might) satisfy HMRC’s employment status tests. This will enable modelling of the financial and operational consequences of the reforms together with consideration and implementation of any changes needed to contractual terms and operational practices, including any contract labour strategy.
Engagement processes should also be reviewed and where necessary updated to ensure appropriate governance and controls are in place to facilitate ongoing compliance and alignment with any agreed strategy.