In November 2017 we blogged about the possibility that the IR35 rules introduced for the public sector last year would be extended to the private sector. The government has now confirmed that it wants to take steps to improve compliance in the private sector and has launched a consultation to look at the options.
What is the current position?
Intermediaries legislation (often called IR35 or 'off-payroll rules') is designed to ensure that individuals providing services via an intermediary (such as a personal service company, individual or partnership), who would have been taxed as employees if they had been engaged directly, pay employment tax in a similar way to employees. The intermediary is responsible for determining employment status and whether IR35 applies and, if it does, for paying tax and national insurance contributions through PAYE on the basis that the consultant is an employee of the company.
The government believes that this approach is not working effectively, estimating that currently only around 10% of those who should comply with the off-payroll working rules do so.
What new rules were introduced for the public sector in April 2017?
The rules were changed for the public sector in April 2017 and now the responsibility for determining whether IR35 applies, and paying tax and NICs if it does, sits with the public-sector employer, not the intermediary. This is reported to have significantly increased compliance, with HMRC estimating that it has raised an additional £410 million in income tax and NICs.
HMRC produced an online tool (Check employment status for tax – CEST) to assist public bodies in assessing employment status and whether IR35 applies. CEST has provided an outcome in 85% of cases, giving a self-employed outcome around 60% of the time: HMRC Factsheet.
What is the government consulting on?
The government is seeking views on how best to increase compliance in the private sector. The lead option is to extend the public sector rules into the private sector so that the client engaging the contractor's services becomes liable for determining employment status and whether IR35 applies; and if it does for paying tax and NICs. However, the government acknowledges in the consultation document that the public sector faced challenges when the new rules were implemented last year and asks for views on whether the design of the reform and the implementation process could be improved.
Other options for reform include 'encouraging or requiring' clients to ensure that those they engage with are complying with the off-payroll tax rules (e.g. by requiring them to show evidence of PAYE returns filed and payments made to HMRC). Anyone found to have used a non-compliant labour chain could face financial penalties or being 'named and shamed'.
The consultation process closes on 10 August 2018.
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