New rules regarding ‘off-payroll’ workers in the public sector came into force on 6th April 2017. This targets individuals working off-payroll through an intermediary business – usually this is a personal service company (PSC). The Autumn Budget 2018 announced on 29 October 2018, included confirmation that the widely expected extension of IR35 reform, otherwise known as off-payroll working rules, will be rolled into the private sector as of 06 April 2020 in respect of large and medium-sized businesses Medium-sized businesses are those with 50-249 employees; large businesses are those with 250 or more employees.
The changes are mainly to target ‘synthetic self-employed’ people who set up PSCs with the sole purpose of paying less National Insurance. While those employed by PSCs have to pay the same Class 1 rates of National Insurance as other employees (in addition to employer’s contributions), those who are employing themselves through a PSC can effectively ‘underpay’ themselves to reduce the amount of NI coming out of their wages, and reap more rewards through dividends – which are taxed at a lower rate and are exempt from National Insurance contributions. Following the roll-out of the reform in the public sector, the Chancellor asserted that there was still widespread non-compliance in the private sector and that is why the changes are being extended into the private sector.
The responsibility for determining the IR35 status of a contract will shift from the contractor to the private sector client.
If a contract is considered inside (caught) by IR35, the party paying the worker’s company – which might be an agency or the end user corporate – will have to deduct PAYE and NI before making payment to the PSC.
The agency / end user effectively becomes the employer of the contractor for tax purposes only, but the individual will remain as a PSC contractor. The contractor will be left with the net payment in their PSC, for which tax credits will apply to avoid double taxation.
Those considered outside IR35 will be able to continue as normal, however, as the IR35 ‘risk’ will lie with the agency/private sector engagers, they will have to risk manage this situation carefully.
How to prepare
- Quantify the issue (internal audit);
- With the public sector rules having been implemented in 2017, private sector engagers are in a much better position, with a finalised CEST tool. A tax status assessment should be undertaken in respect of each contractor by way of using the CEST;
- Develop a strategy and risk management approach for your business going forward.
The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.
© Miller Rosenfalck LLP, October 2018