IR35 and the private sector
The public sector reform is estimated to have generated an additional £410m of income tax and National Insurance Contributions since April 2017. As a result, the HMRC will view the private sector consultation as an opportunity to expand on this perceived success, both in increasing tax revenues and resolving some of the compliance challenges they faced in enforcing IR35.
The HMRC estimates that around 1/3 of people working through their own company should fall within IR35 and be taxed as employees, but only 10% of this group have identified that they meet these criteria. The cost of non-compliance in the private sector is expected to increase from £700m in 2017/18 to £1.2billion in 2022/23, with the costs continuing to increase as the number of people working through Personal Service Companies (PSCs) rises.
So, what options are the HMRC considering to tackle non-compliance in the private sector?
Extending the public sector off-payroll rules
The Government’s lead option for reform in the private sector is to extend the public sector off-payroll rules. However, the Government recognises the challenges that public sector bodies faced when implementing the public sector reforms. So, as part of the consultation the HMRC will be exploring whether the design of the reform and implementation process could be improved, at the same time as looking to ease the administrative burden resulting from the implementation of the rules.
Encouraging or requiring business to secure labour supply chains
Another option being considered is encouraging or requiring businesses to ensure that consultants working for them via their labour supply chains are IR35 compliant. Suggested checks are as follows:
- Ensuring the labour chain is commercially sustainable so it can meet statutory tax obligations and make a profit
- Checking the history of the labour supply business – if a previous business failed because it did not pay its tax debts, what processes have been put in place to avoid the same problems?
- Adding a clause to the contract requiring labour suppliers to show evidence of the PAYE returns filed and payments they made to HMRC
- Adding a clause in the contract requiring authorisation of further subcontracting before any of the suppliers are sub-contracted to a third part labour provider
- Adding a clause in the contract preventing the use of offshore intermediaries
- Where workers supplied by recruitment firms are being treated as self-employed, deciding if the ‘agency rules’ apply (i.e. whether the recruitment firm should tax at source)
- Ensuring the recruitment firm has complied with employment intermediary reporting requirements and has evidence of submitted reports to HMRC where they do not operate PAYE (this includes where they use an umbrella company)
Additional record keeping
To reduce the time required for HMRC to conduct investigations into the incorrect classification of contractors and freelancers, organisations could be required to retain certain records on off-payroll engagements. This might include information about contracts, shift rotas, and line management reporting requirements and could potentially speed up the compliance process, helping HMRC to progress cases more quickly.
However, the HMRC has stated that they recognise that this option may not be desirable given the significant administrative burden it places on all parties, as well as how this would be enforced throughout a supply chain.
The consultation is welcoming other suggestions for combatting non-compliance, but has said that any solution would have to meet the following criteria:
- It must address or mitigate the compliance challenges (see the consultation document for further details);
- It must be efficient for HMRC to enforce, providing value for the tax payer; and
- It must not be disproportionately burdensome to administer for clients, PSCs, and recruitment firms
What are the potential risks for the IT sector?
The key area of concern for IT contractors and freelancers and organisations looking to hire them, are the continued reports of freelancers and contractors who have been incorrectly accused of flouting the rules, based on previous incorrect classification decisions taken by public sector organisations. However, these issues seem to have reduced over time, as a result of the introduction of the IR35 CEST tool and increased experience in managing the new processes.
There have also been reports of contractors who have increased their rates since April 2017, to help negate the impact of being classified as in-scope of IR35 on their take home pay. Similarly, concerns were expressed when the reform was introduced to the public sector, that public bodies would find it harder to fill off-payroll vacancies as the talent migrated to the private sector.
Research has found that whilst the overall impact of this has been low, it has had a higher impact in areas where skills were already known to be scarce. And whilst the research hasn’t gone into detail around the specific skills, it’s likely that IT roles will have been effected by these issues. Whilst the extension of the IR35 reform to include the private sector may dampen the impact of increased rates and hiring issues to a certain extent, it’s likely that some contractors will simply avoid roles which look like they will fall within the scope of IR35, making some positions very difficult to hire for across the board.
Ultimately, the reform to the regulations are designed to make employment and payment of taxes more fair throughout the economy, but the consultation should give special consideration to the impact of any changes on areas of skills shortages in the UK. This is particularly important in light of Brexit and the likelihood that businesses in the UK will find it increasingly difficult to hire talent from across the EU.
The HMRC’s consultation on off-payroll rules in the private sector will run for 12 weeks, closing on the 10th of August 2018. All responses are welcome – you can find out more and submit responses here.