In the aftermath of the Budget it is clear there are two announcements which will have particular relevance to the contractor sector.
Firstly, the government will consult on how to tackle non-compliance with the intermediaries legislation (commonly known as IR35) in the private sector with a particular focus on extending the recent off-payroll working in the public sector rules to the private sector.
Under the existing public sector rules, if an individual is providing services through a Personal Service Company or any other type of intermediary to a client in circumstances where the individual would otherwise be viewed as an employee of that client, the client must deduct tax and national insurance from the payments made to the PSC or intermediary.
The government will be motivated to push these changes through in the private sector, as they do not have the resources to visit every PSC which could be within IR35 so tax assessments under the IR35 rules are rare. If the burden is moved to the clients who use the PSCs, HMRC can visit a single business and send a tax assessment to that business that could cover multiple PSCs if they are caught by these new rules.
Although this may mean an end to IR35, it does potentially place PSCs in a difficult position as their clients will be encouraged to use the HM Revenue & Customs online Status Indicator tool. The government acknowledges that this change will require significant consultation and says that it recognises, “the importance of taking account of the needs of businesses and individuals who would implement any change. The consultation will draw on the experience of the public sector reforms, and external research already commissioned by the government and due to be published in early 2018.” If there is a change to these rules, the change could come into force as early as April 2019.
Secondly, the government will publish a consultation as part of its response to Matthew Taylor’s review of modern working practices. This will focus on considering options for reform to make the employment status tests for both employment rights and tax clearer.
Looking back to the Taylor Review, the paragraph which will play a major part in this consultation is, “…government should look at what the test is for worker status. Currently, an individual can have almost every aspect of their work controlled by a business, from rates of pay to disciplinary action and still not be considered a worker if a genuine right to substitution exists. We do not think this is fair, or reflects many of the opportunities presented in the modern world of work…we therefore think that it is important for Government to ensure that the absence of a requirement to perform work personally is no longer an automatic barrier to accessing basic employment rights.”
If the government changes the rules so that a person should be treated as an employee even where there is a genuine right of substitution then a large number of individuals currently categorising themselves as self-employed would fall to be treated as employees or within the IR35 rules. It is easy to imagine that the two announcements go hand-in-hand, so the definition of an employee will be widened at the same time as placing an obligation on private sector clients to withhold tax and National Insurance from PSCs.
The government acknowledges that, “this is an important and complex issue, and so will work with stakeholders to ensure that any potential changes are considered carefully.”
No date has been given for the launch of this consultation but expect it to be released in early 2018 so legislation can be issued in draft form after the Autumn Budget 2018.
Tim Stovold is head of tax at Kingston Smith
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