Off payroll, off limits? Important changes to IR35
The Government appears set to press ahead with more tax reforms in off-payroll worker arrangements.
The Government appears set to press ahead with more tax reforms in off-payroll worker arrangements. Importantly, the expected reforms will impact on every private sector organisation which engages and pays off-payroll workers through the intermediaries legislation (commonly known as IR35).
The current position
Currently, contractors/consultants who provide their services to a private sector organisation through an intermediary (such as an agency or personal service company) are subject to the tax requirements of IR35.
This requires those contractors to undertake a test; the Employment Status (“ESI”) test. The test expects the contractor to consider whether, but for the presence of the intermediary personal service company or agency, they would be regarded as an employee of the private sector organisation. If so, then the payments received from the private sector organisation, by the intermediary, should be subject to PAYE deductions.
HMRC have been concerned for a number of years that the IR35 legislation is not being properly applied by intermediaries and that significant tax revenue is being lost. However, given the many thousands of small intermediary relationships in the economy, HMRC recognises that effective enforcement is a tall order.
In April 2016, the rules relating to IR35 changed for public sector organisations engaging contractors through intermediaries. In summary, new arrangements place the onus on a public sector organisation to apply the ESI test and, where appropriate, to make PAYE deductions from the amounts owing to their contractors, rather than leaving the intermediary/contractor itself to apply the test and decide whether PAYE deductions should be made.
Since those changes came in to being, it has been assumed by many that the private sector would follow.
What changes will be introduced?
The Government has just published a consultation paper about potential reform to off payroll work in the private sector and of course it is not possible to say what the outcome of the consultation will be. The consultation period closes in August 2018.
That said, whilst other arrangements are raised as possibilities in the Government’s consultation paper, the indications are that adopting the same approach as was introduced in the public sector in April 2016 is the preferred approach. We will be surprised if there is a different outcome.
When are the changes likely to apply?
We will know more following the close of the consultation period and any update on the outcome included within the Chancellor’s Autumn statement later this year. However, changes from April 2019 are a distinct possibility.
Separate consultation exercises have taken place (including a consultation on employment status) following the recent Taylor Review of Modern Working Practices. One may argue that it would be sensible to review and reform the law relating to worker status and the tax regime for work done, at the same time. Whilst this does not currently appear to be in the Government’s sights, if the two issues are combined, there may be some further delay in implementation.
We will provide more commentary on this expected reform in the coming months.
Mark Leach and Pili Fernandez-Mahoney (firstname.lastname@example.org) are members of the Manchester Employment, Pensions and Immigration team. If you have any questions or concerns please do not hesitate to contact Mark or Pili, or your usual Weightmans advisor.