HM Treasury and HM Revenue and Customs (‘HMRC’) have published a consultation to review the impact of IR35 reforms made to the public sector in April 2017 and whether these reforms could be adapted to tackle non-compliance for off-payroll working rules in the private sector. HMRC are asking for comments on how to best address the compliance challenges and are particularly interested to hear how the off-payroll reforms could be adapted to suit the private sector.

What are off-payroll rules?

Off-payroll legislation is often called IR35 which is legislated for within Part 2, Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’). IR35 was introduced in April 2000 to ensure that any individual working through an intermediary (for example their own Personal Service Company (‘PSC’)) who would have been regarded, for income tax and NIC purposes, as an employee if the were directly engaged by the labour user, pay broadly the same income tax and National Insurance Contributions as an employee.

Currently, the PSC is solely responsible for making the determination of their own employment status, therefore many individuals are content with the risk as it increases their take home pay and HMRC do not have the resources to investigate all PSCs in the UK. HMRC report that only 10% of people working through their own PSC do not determine themselves as self employed and so, do not pay PAYE.

IR35 Reforms in April 2017 – Were they successful?

HMRC dislike that individuals are wrongly branding themselves as self-employed, as it means less tax is paid resulting in less cash for the exchequer. Therefore, in April 2017 HMRC introduced reforms in the public sector only, which shifted the risk and liabilities from the PSC to the public authority labour user. These reforms were implemented under Part 2, Chapter 10 ITEPA.

HMRC did this for several key reasons – one of them being if it is not tackled, the non-compliance is projected to cost £1.2 billion in 2022/23 (an increase from £700 million in 2017/18). HMRC also allege:

  • PSCs satisfied being non-compliant.
  • PSCs do not have the knowledge or capabilities to assess their own employment status.
  • If the PSC was found to be non-compliant they would dissolve their company to avoid repaying the tax owed and incorporate a new company.

Therefore, HMRC’s reform was implemented on the basis that if a public authority labour user is found to be non-compliant, such as the NHS, they cannot dissolve to avoid repayment of any liabilities. HMRC believe a public authority labour user has more knowledge and assets to assess employment status and they will suffer reputationally if they did not adhere to the legislation.

Also, the reform made it easier for HMRC to commence enforcement proceedings, as they can open an enquiry into a public authority labour user or fee payer, as opposed to lengthy compliance activity against the PSC, which may not have the funds to pay any debts which are found to be due. Currently in the private sector a separate enquiry has to be raised for each individual PSC.

How to tackle non-compliance in the private sector?

HMRC are considering the following:

1. Extend the public-sector reform to the private sector

This will mean the liability for employer’s National Insurance Contributions will transfer to the labour user or agency or contracting intermediary (‘the fee payer’) who is responsible for deducting the correct taxes, to ensure that the PSC worker and the fee payer fulfil their tax obligations.

HMRC wants to know; What difficulties the private sector face that could stop them from extending the reforms to the private sector? If there are any difficulties how can they be mitigated?

2. Requiring businesses to secure their labour supply chains

Using HMRC’s Use of labour providers: advice on due diligence guidance, businesses could be required to help ensure that off-payroll worker provided to them thorough their labour supply chains are complying with the off-payroll working rules in the private sector:

  • Make sure their supply chain is commercially sustainable, so it can meet statutory tax obligations and make a profit (ensure the supply chain is complying with the off-payroll working rules)
  • Check the history of the labour supply business
  • Require labour suppliers to show evidence that PAYE returns have been filed and payments have been made to HMRC
  • Add a clause in the contract requiring authorisation of further subcontracting
  • Add a clause in the contract to prevent the use of offshore intermediaries
  • Require a valid copy of the Check your Employment Status for Tax (‘CEST’) determination undertaken by a PSC
  • Review if section 44 ITEPA applies to self-employed workers supplied by agencies and ensure the agency has complied with the employment intermediary reporting requirements

Alternatively, the above checks could be optional but labour users who haven’t performed them and are found to be using a non-compliant labour supply chain could be named publicly.

3. Additional record keeping

Another option considered is requiring labour users to keep information such as rotas and line management reporting requirements relating to the engagement to allow HMRC to quickly commence enquiries into PSCs.

This option would bring added administrative burdens to labour users, as well as penalties for failure to hold the required documentation.

Aspire Comment

It is predicted that the Government’s intention is to expand the scope of the reforms to the private sector. This would be unsurprising on the basis that HMRC have seen an increase in PAYE for the exchequer.

However, many would question whether this is the correct decision as there are problems to fix within the public sector, mainly the unreliability of the CEST tool. At Aspire, we have used the CEST tool a number of times and the tool has come to the conclusion that it cannot determine the employment status from the answers provided – this is not helpful for labour users or the fee payer. Despite this, the consultation states the CEST tool allowed public authorities to make quick and easy assessments. However, those surveyed by HMRC did state the earlier version of the CEST tool made the reform difficult to implement.

Research also confirmed that some public authorities found it harder to fill off-payroll vacancies.

We are also aware that labour users made ‘blanket decisions’ that all PSCs are deemed as employees and so, subject to PAYE, despite this being against HMRC guidance which states assessments should be made on a case by case basis. This will be due to the fact that it is time consuming for public authorities to review each PSC worker’s position on a case by case basis to determine employment status.

To read the full consultation click here. Responses should be submitted by 10th August 2018.

Minden U.K. Limited use Aspire Business Partnership LLP. This firm provide Minden U.K. Ltd with practical and commercially sound advice in relation to all aspects of compliance, business strategy and conflict resolution. Original article can be found on Aspire’s website: http://www.aspirepartnership.co.uk/News/3133/summary-of-the-off-payroll-working-in-the-private-sector-consultation