Consultation on private sector off-payroll working rules

HMRC and HM Treasury have published a consultation document considering a number of potential options for improving levels of compliance with the off-payroll working rules (IR35) in the private sector. As announced at Autumn Budget 2017, the main option under consideration is the extension to the private sector of reforms similar to those introduced in April 2017 for public sector off-payroll engagements. These rules made public sector bodies directly responsible for determining whether workers engaged through intermediaries would be regarded as employees for PAYE purposes if they were engaged directly.

The consultation document begins with an evaluation of the effectiveness of the new public sector off-payroll working rules over the past year, based on the findings of independent research commissioned by HMRC. It goes on to set out HMRC’s view of current factors contributing to non-compliance with the IR35 rules in the private sector, before putting forward a number of options for changes to improve private sector compliance. The deadline for responses is 10 August 2018 (see https://bit.ly/2KwWpoY).

HMRC’s research report, Off-payroll reform in the public sector (see https://bit.ly/2KOv5Tl), contains the findings of research carried out between August and October 2017 into the impact of the public sector rules, involving a survey of 117 central bodies and 100 individual sites in the public sector. The responses indicated increased levels of compliance, with an estimated £410m raised as a result of the reforms. HMRC’s analysis of PAYE data covering the first 10 months of the reform, from April 2017 to February 2018, shows, each month, around 58,000 more individuals than expected paying income tax and NICs when undertaking work for a public authority. The research found:

• some initial problems in implementing the reform, with 97% of central bodies and 90% of sites confident they were compliant by August 2017;
• half of respondents saying they found the public sector reform easy to comply with;
• most central bodies (91%) and sites (87%) making assessments of their off-payroll engagements on a case-by-case basis, rather than determinations without assessment;
• no conclusive evidence overall that public authorities have found it harder to fill off-payroll vacancies as a result of the changes; and
• initial costs for setting up systems and processes required to implement the reform, with around half experiencing either no change or a decrease in ongoing administration costs.

HMRC estimates that although around a third of people working through personal service companies (PSCs) should be taxed as employees under the IR35 rules, this is only the case for 10% of this group. The document summarises the problems HMRC has in enforcing compliance in the private sector under the current off-payroll working rules as follows:

• enquiries need to deal individually with each PSC, even where there are numerous workers engaged and working in the same way for a single client;
• the perception that there is a very limited chance of HMRC opening enquiries and a low risk of being found non-compliant;
• the widespread advertising and selling of so-called ‘IR35 proof’ contracts, or offers of ‘insurance’ against being found non-compliant with the legislation;
• a long time-lag between the engagement taking place and the date when tax on the income arising from the engagement becomes due;
• the fragmentation of responsibilities within the labour supply chain over how work is supplied and carried out, and payment of tax; and
• the length of time it can take to recover amounts due from PSCs once a tax liability has been established.

The main options the government puts forward for improving compliance in the private sector are:

• applying new rules to the private sector similar to those introduced in the public sector, involving transferring responsibility to the engager for determining the correct status and deducting the correct tax and NICs; and
• improving on the public sector rules by enabling HMRC to use its recovery powers where agencies (as fee-payers) disregard determinations by their clients (as engagers) about a worker’s employment status and decide, incorrectly, not to operate PAYE.

Other options being considered are:

• encouraging, or requiring, clients to undertake specific checks, underpinned by penalties, based on HMRC’s guidelines in ‘Use of labour providers: advice on due diligence’; and
• additional record-keeping requirements on clients, when making payments to PSCs either directly or through an agency, to retain certain information such as contracts, shift rotas, and line management reporting requirements relating to the engagement.

The government acknowledges that these last two options would create extra administrative burdens, without directly affecting compliance.

A range of other suggestions were made, but not taken forward in this consultation, as they would either change the tests for determining whether the off-payroll working rules apply, or change the tax/NICs treatment of those found to be inside, or outside, the rules. These suggestions included:

• exclusion for minimum length of engagement;
• the creation of a new freelancer limited company;
• requiring the client to pay employer NICs; and
• the introduction of a flat-rate withholding tax, similar to the construction industry scheme.

John Chaplin, associate partner at EY, called the consultation ‘very limited in choice and weighted in favour of a simple roll out of the public sector changes into the private sector’. He found it ‘disappointing that other alternatives, such as a flat-rate withholding tax or a de minimis length of engagement before IR35 applies, have already been ruled out of scope’.

‘No implementation date has been given, but HMRC has stated previously that it will not rush,’ Chaplin said. ‘Whilst a start date of 6 April 2019 cannot be entirely ruled out, I hope that any implementation will not be before April 2020 to give businesses a realistic chance of making the necessary changes to policies, processes and systems. Make no mistake, this will be a big issue for any business using large numbers of contractors,’ he added.

Ian Hyde, tax partner at Pinsent Masons, agreed: ‘The outcome of this consultation is likely to be that businesses will be forced to take on the risk of contractors’ failure to comply with IR35,’ he said.

‘Extending the public sector rules to the private sector would give HMRC a more straightforward enquiry process,’ Hyde explained. ‘Rather than chasing every PSC, they will be able to start a single enquiry with the engager.’ This will increase HMRC’s effectiveness, he added, which means ‘businesses can expect significantly more scrutiny of contractor status’.