Although it never made the actual speech, hidden in the small print of the chancellor’s autumn budget is news that the off-payroll tax regime (introduced in the public sector in April 2017) is working well and “a possible next step would be to extend the reforms to the private sector”. The budget goes on to promise a consultation in 2018. This will likely come as a big surprise to many private sector businesses; after all, this seems to be the first time extending the rules to the private sector has been raised as a possibility.
What is the current position?
Currently, in the private sector, the obligation to decide if the IR35 rules apply falls on the intermediary (which is usually the worker’s own personal service company). The IR35 applies if the worker would have been considered an employee if their own company didn’t exist, in which case the intermediary must pay extra tax and NICs on the ‘deemed employment payment’ (taking the taxation to a similar level as that of an employee).
What is off-payroll working
In April this year, changes were introduced in the public sector, which places the burden of deciding whether IR35 applies onto the public sector body. As a result, when public sector bodies hire consultants via personal service companies (or chains of intermediaries), the off-payroll working rules may operate to create a ‘deemed employment’ relationship for tax purposes. The public body is then either itself responsible for accounting for PAYE (and some other payments), or has a duty to provide specified information to the relevant fee-payer (for example, an agency).
How are the off-payroll rules working in practice?
I have spent the last year advising public sector bodies on the implementation of the off-payroll working rules and I am deeply concerned that the government is considering rolling the rules out to the private sector so soon. The rules have not yet properly settled in and there has simply not been enough time to iron out the issues, and for lessons to be learned from the public sector experience.
Critics argue that the rules create an incentive on public bodies to determine that the rules apply to consultants and operate PAYE, when in reality the individual is genuinely a self-employed contractor. I have not yet seen any evidence of this, but the reality is that many of my public sector clients are struggling to apply the off-payroll working rules in practice and they are causing very real difficulties on the ground.
The guidance on off-payroll working recommends using the HMRC online employment status test – but in reality, the legal test for employee status is notoriously complex and difficult to apply. This means the simplicity of HMRC’s online calculator sometimes produces unexpected results. Indeed, the test sometimes concludes that even HMRC cannot determine the employment status of the consultant, so how are end users supposed to have any certainty that they have correctly applied the rules?
Given these issues, I’m not at all surprised that the complexity of the off-payroll rules has prompted some of my public sector clients to scrap the use of consultants altogether.
Private sector businesses that use consultants to provide specific skills, or to undertake one-off projects, need to look out for the promised consultation and start thinking about the impact the rules could have on them if the planned roll-out to the private sector proceeds.
Luke Green is a partner at Hill Dickinson