The UK tech sector is not alone in witnessing a significant shift in its labour market in the last decade. It has seen an increasing number of ways in which workers can provide their services.
The rise of the ‘personal services company’
In particular, the past decade has seen a rise in individuals – who might otherwise be employees – providing services to businesses through a ‘personal services company’ (or, PSC). Under this arrangement, the individual is not an employee of the business. Rather, the PSC is a consultant or service provider, and the business is its customer. The individual is an employee and shareholder in the PSC. There can be various tax advantages to adopting this structure, provided it is done properly.
However, workers and businesses using the PSC structure must comply with the IR35 rules, named after the Inland Revenue press release which first introduced the then Government’s plans to tackle ‘disguised employment’. IR35 requires individuals working through a PSC to pay broadly the same tax and NICs as any other employees, where they would have been an employee if they were providing their services directly.
The problem is not only policing the use of PSCs but the number of individuals actually paying tax under IR35 has remained fairly static since 2000. There has been a substantial increase in the number of PSCs during the same period. The result is that IR35 is as controversial today as it was when it was launched.
The underlying tax compliance concern remains that two people doing the same job, in the same way, can end up paying very different levels of tax depending on how they are engaged. HMRC estimates this will cost the Exchequer this year in the region of £430 million. However, this figure is disputed by commentators.
The way ahead – putting the burden on business?
One option now under consideration is to take the burden of proof of IR35 compliance away from the ‘worker’, and give it to engagers of contractors. Anyone for more red-tape?
This would represent a dramatic change in the way IR35 is currently operated; however, we have already seen this introduced in parts of the public sector and so it is perhaps a logical step for it to be applied to all.
If this arrangement became law, then those who engage a worker through a PSC would need to consider whether or not IR35 applies (in the same way as they would need to consider whether a worker should be self-employed or actually be an employee). If, following this analysis, IR35 does not apply, the business which engages the worker would need to deduct the correct amounts of income tax and NICs as they would for direct employees. This increases the burden on businesses which engage such persons.
The Government is alive to the concern that businesses which engage persons via a PSC do not want to get it wrong. It has indicated that an element of any reform could be to simplify the multi-factor test for determining if IR35 applies. One option put forward for comment could be to align the test with that used for temporary workers in the agency rules, which is based on supervision, direction or control. Determining a worker's employment status is currently less than straightforward. ‘Control’ is just one of a number of relevant factors. It is, according to HMRC, the right of control that currently matters. This control may take the form of the way in which a worker performs their services, what tasks have to be performed, when and where they must be performed. Therefore, for instance, an employee will usually be expected to work set hours each day or week whereas an independent contractor is more likely to have the freedom to work when and where they want.
The way ahead – minimum engagement periods?
Another option for comment could be to look again at requiring an engagement to last a certain minimum amount of time to be considered one of employment.
The ‘dialogue’ is scheduled to end on 30 September 2015. However, any changes to the rules arising from that dialogue will be subject to a formal public consultation. The Government is adamant that abolishing IR35 is not an option despite HMRC accepting that the IR35 legislation is not working in practice; many arguing it remains too subjective and in practice too expensive for HMRC to administer compared to the additional tax collected.
If you would like to be involved in discussions on the future of IR35, or provide written views on the subject, please contact HMRC by email at email@example.com.