Personal service companies in the private sector – change is on the way
FOLLOWING the Government’s introduction of off-payroll reporting in the public sector in 2017, the long anticipated consultation on privatesector off-payroll working, known as IR35, has now been published.
What is IR35?
IR35 is tax legislation designed to combat tax avoidance by workers or contractors who supply their services to clients via an intermediary – such as a ‘personal service company’ (PSC) – but who would actually be an employee of their client if there was no intermediary? Such workers are called ‘disguised employees’ by HMRC. In effect, a PSC will need to comply with IR35 if the contractor supplying their services does not meet HMRC’s definition of ‘selfemployment.’
Why the need for reform?
The Government has strong views on current levels of non-compliance: HMRC estimates that only 10% of workers who should operate the IR35 rules currently do so, hence the need for reform. It estimates the current annual cost of non-compliance in the private sector at around £700m, and this could increase to £1.2bn by 2022/23.
HMRC faces many difficulties in enforcing the current IR35 rules, with each PSC requiring individual review. This takes time and, even where the PSC is ultimately found to be liable for additional tax/NICs, collection presents a further challenge.
So what are the proposed solutions?
HMRC makes clear that “the lead option” in addressing noncompliance is to extend the reforms which were introduced in the public sector. This would make the “client”, ie. the end-user of the contractor’s services, responsible for assessing the contractor’s employment status. Whichever entity then pays the PSC, be that the client or an agency, will be responsible for operating any appropriate PAYE/NIC withholding.
Other options include requiring businesses to secure their labour supply-chains through various checks or to keep substantial records for any off-payroll engagements.
Potential solutions which have been discounted outright include the use of a flat-rate withholding for off-payroll workers similar to the scheme used in the construction industry, or the introduction of an employer NIC charge for clients using contractors.
What next?
The consultation closes on August 10, 2018, and it’s not clear how quickly any changes would be implemented. The consultation which dealt with the public sector reforms came out at a similar point in May 2016 with a similar closing date (August 2016). Those changes then came into force in April 2017.
So should we expect any changes to apply from April 2019? Probably not. The new Budget timetable and policy-making process previously announced by Government suggests an April 2020 implementation as the earliest date, and this would give businesses time to understand the impact and update processes and systems.
The impact of these proposals should not be underestimated – this could represent the most significant change to the operation of employment taxes for many years. Under the lead option being considered, there are likely to be major cost implications – largely driven by the employer NIC charge which would apply to any engagements deemed to be employment arrangements.
Additionally, operational challenges associated with the changes could be substantial. Organisations may find it difficult to identify the off-payroll workers, and then face challenges in collating the information required for an informed determination of employment status to be made.
Add to that the suggestion made in the Taylor Review – and reflected in February’s Employment Status consultation – that those workers deemed to be employees under IR35 should also get access to wider employment rights, and you can start to see the broad impact these changes could have.
How PwC can help
Whatever the outcome of the consultation, the Government seems clearly set on reforming the rules and it’s highly likely there will be an increased compliance and administrative burden for businesses. Now might be a good time to strategically review the structure of your workforce and look at your recruitment policies.
PwC’s considerable experience with the public sector reforms can help you avoid some of the challenges and pitfalls.
PwC services include:
Using bespoke software, the data analytics team can quickly manipulate your supplier data to identify PSCs requiring further review. Experience shows this initial exercise can be extremely onerous (and erroneous) if carried out manually.
Reviewing PSC contracts and de facto working conditions to determine the deemed employment/
nnself-employed status.
Working with you to update and future-proof your recruitment strategy.
Contact PWC for a discussion of your requirements: Jonathan Evans jonathan.r.evans@pwc.com, 07595 610566 or Tanya Johnson tanya.c.johnson@pwc.com, 07841 468664.
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