The 2018 Budget announced, among other things, the introduction of off payroll working rules (more commonly known as IR35) in the private sector.
IR35 rules were originally introduced in 2000 with the requirement that individuals who work via a company should be subject to equivalent employment tax rues as employees who are directly engaged by an organisation, if their role and how they carry out their work is something that could be classed as employment. Essentially – if the only thing stopping an individual from being classed as an employee for tax purposes is the company sitting in between the individual and the work provider, then that individual should be treated as an employee in a tax assessment.
Historically, the entity responsible for assessing which roles fell within scope of the IR35 rules as described above was the limited company, with the liability falling upon the company and not the individual contractor. In 2017, within the public sector, the burden of assessing IR35 shifted to the work provider. This change has led to number of HMRC investigations that have resulted in findings of many unpaid employment taxes and National Insurance contributions (NICs). In fact, HMRC estimates that this reform has resulted in £550 million in income tax and NICs raised in just its first year.
The Government holds concerns over the effect of owed tax in the private sector, as many personal service companies will claim they do not fall within scope of IR35, even if, under the new public sector scheme, they may in fact be incorrect. HMRC estimates that the current cost of non-compliance in the private sector will reach £1.3 billion a year by 2023 – 2024.
The announced change in the 2018 Budget will look to mirror what is now in place with the public sector and ultimately, the government hopes, recover some of that underpaid tax.
Of course, extricating individuals and their personal service companies from their current contractual agreements will likely not be straightforward and so this will not come into effect until April 2020 and even then, will only apply to large or medium size business. The 1.5 smallest businesses, according to the HM Treasury, will not be affected by this change and will continue to operate under the original IR35 rules. There has been no guarantee, however, that these new changes will not eventually be rolled out across all private sector businesses, regardless of size.
The direct result of these changes will be that limited company contracting may very well become less popular with larger businesses – in particular, businesses operating in industries which have typically engaged large numbers of limited company contractors in the past, such as IT, financial services and business consultancies. The likelihood is that highly skilled professionals will likely fall out of scope of IR35, but it may be that large companies are unwilling to risk prompting a HMRC investigation.
The government has, likely to the relief of many companies, stated that this “reform is not retrospective” and so will not result into HMRC going back to investigate taxes paid before this reform under IR35. Further consultations are also planned on the details of how this reform will operate in the coming months.