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Private sector IR35 clampdown announced in the Budget

  • United Kingdom
  • Brexit
  • Employment law
  • Tax planning and consultancy

30-10-2018

In recent years, more people have used their own limited company on a flexible or contracting basis in order to provide their services to businesses, often in the construction, retail, IT, media and professional services sectors. By providing their labour through a limited company, or other intermediary, these workers typically pay less tax. The Government believes that many of these ‘personal service companies’ (PSCs) should be paying higher taxes under the off-payroll, or IR35, rules and, to drive up compliance, it is introducing changes which affect the private sector.

Background

IR35 is tax legislation aimed at combatting tax avoidance by workers who supply their services to clients via an intermediary, such as a PSC, but who would be taxed as employees if engaged directly. Where IR35 is applied, the worker pays broadly the same employment taxes as if they were employed. A key element of the IR35 legislation was that it required the worker to decide whether or not they should be regarded as employed or self-employed.

IR35 has been in place for over 17 years but the Government believes that compliance is low, with only 10% of people paying the right tax, and the cost of non-compliance will reach £1.2 billion a year by 2022/23.

Change announced in the Budget

To address this, from 2020 the Government intends to change the way in which IR35 operates where work is being done for a large or medium sized business. In such cases, the responsibility for determining whether IR35 applies will be transferred from individual workers, who work through PSCs, to the organisations using their services. In addition, if IR35 applies, the organisation who pays the PSC (which may be the end-user or an intermediary agency) would also become responsible for deducting and paying to HMRC the relevant income tax and NICs.

The changes will bring large and medium sized businesses in the private sector into line with the public sector: public authorities were made responsible for determining employment status and, where appropriate, deducting income tax and national insurance last year.

Comment

The Government estimates that one-third of individuals working through their own company are not genuinely self-employed and should be taxed as employees, but only a small fraction are currently pay the correct tax. As such, a significant number of freelancers and contractors, who work through PSCs, stand to be detrimentally affected by the change. In response, such workers may give up off-payroll working or seek to increase their rates to offset any new tax deductions.

For large and medium sized private sector businesses using off-payroll workers, there are concerns that the pool of flexible skilled labour will reduce, and people costs will increase, just when staffing challenges are already being felt.

Businesses affected will face the added bureaucracy and costs associated with setting up new systems and processes to comply. Staff will need to be trained in assessing employment status against a backdrop of legal tests that are difficult to apply and HMRC’s employment status check tool. Since the change was introduced in the public sector last year, some end-users have been accused of applying IR35 where the circumstances do not warrant it in order to insulate themselves against potentially costly challenges by HMRC. But an overly cautious approach by hirers brings its own risks, such as deterring off-payroll workers and driving up costs.

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