Private sector off-payroll working: proposed IR35 changes

The government is consulting on reforming IR35 in order to tackle non-compliance with off-payroll working rules in the private sector.  The reforms could see end-user clients given responsibility for determining a contractor’s employment status and responsibility for operating PAYE transferred from the contractor’s personal service company to the fee-payer.    

What is IR35?

The off-payroll working rules (IR35) are designed to ensure that anyone providing their services through a personal service company (or other intermediary) who would, if engaged directly, be regarded as an employee for tax purposes, pays broadly the same income tax and NICs as if they were employed. 

The legislation leaves it to the contractor’s personal service company to determine their employment status for tax purposes and to operate PAYE and pay employer NICs.  HMRC estimates that around one third of those working in this way are caught by IR35 and should be taxed as employees, but in fact only 10% are taxed in this way.  The cost of non-compliance in the private sector is currently estimated at £700 million, projected to increase to £1.2 billion by 2022/23. 

What has changed in the way IR35 works?

In April 2017, the Government made changes to the legislation in the public sector, making the public sector client responsible for determining the individual’s employment status for tax purposes and the fee-payer responsible for operating PAYE and paying employer NICs where the individual is determined to be an employee.  It introduced an online employment status tool to assist with the assessment.  The Government considers these reforms have been successful in increasing tax compliance (an additional £410 million has been raised) and have made enforcement easier for HMRC.  

What is the government consultation considering; off-payroll working in the private sector

The government issued a consultation on 18 May setting out possible options for reforming the legislation in the private sector and seeking views. This makes it clear that it considers extending the public sector reforms to the private sector to be the lead option.  This would mean that end-user clients would be made responsible for assessing a contractor’s employment status for tax purposes and, where deemed to be an employee, the entity that pays the personal service company (be that the client or an agency) would be responsible for operating PAYE and paying employer NICs.   

Other options considered in the consultation include: 

• encouraging/requiring businesses to secure their labour supply chain and ensure, through the use of various checks, that the off-payroll working rules are being complied with; and
• requiring businesses to keep substantial records for off-payroll engagements. 

The government also asks whether there are any other options it should consider.     

The consultation closes on 10 August. It is possible that changes could be in place from as early as April 2019, although April 2020 seems more likely.