Off-Payroll Working in the UK Private Sector: Next Steps

We recently reported that the UK government is going ahead with its plans to make changes to the off-payroll working rules (IR35) in the private sector. These changes will be of interest to any business that engages individuals to provide their services via their own limited company, commonly known as a personal service company (PSC). 

The IR35 rules were introduced in 2000 and require that individuals who work like employees, but through companies, pay similar taxes to actual employees.  

In line with the changes made in the public sector in April 2017, the new rules will mean that the end-user business (rather than the PSC) will be required to determine whether IR35 applies and the responsibility for dealing with PAYE and National Insurance (NI) will, therefore, rest on the payer of the PSC, i.e. the end-user client or the agency. The expectation is clearly that those end-users will err on the side of caution in making that assessment and, therefore, that more tax/NI will be deducted to the benefit of the Treasury. The reforms will not apply to small businesses (yet to be defined).   

A further consultation on how the rules will work in practice will be published in the coming months, with draft legislation due in the summer of 2019.   

While it is good news that the changes will not come into effect until 6 April 2020, end-users should start considering now how best to approach the new rules, including: 

• Reviewing your current arrangements – how many PSCs do you engage with? How practicable would it be to carry out a case-by-case analysis? What do your contracts say about tax? 
• Testing your current arrangements through HM Revenue & Customs’ online tool for checking employment status (CEST) – on which side do they fall?
• Thinking about how you might engage individuals going forward. 

How Does This Interact With Employment Status More Generally?  

HM Revenue & Customs’ proposed changes to the IR35 rules are aimed solely at improving compliance (i.e. increasing its tax revenues). However, any business that engages consultants, contractors, freelancers, etc. (whether through a PSC or directly), should think more generally about the employment status of its workforce. We are seeing more and more “self-employed” individuals challenging their status before the employment tribunal. The costs of misclassification can be substantial, with claims for unpaid National Minimum Wage, pension contributions and holiday pay, as well as tax/NI contribution liabilities, penalties and interest. 

Our combined team of employment and tax specialists has recently worked with a number of clients to audit their working arrangements to minimise or highlight key areas of risk and ways to reduce it. To find out more about how we can support your business, please contact one of the following partners from our dedicated tax and employment status team.