Legal Will new payroll rules settle the war between contractors and HMRC?
HMRC’s attempt to level the playing field between individuals employed through payroll and those providing their services through a personal service company began in 2000 with the introduction of the IR35 rules. These required individuals operating as if they were employees of the businesses receiving their services, but who invoiced through personal service companies, to volunteer to pay additional tax and national insurance.
If they failed to volunteer into the IR35 tax charges, they were at risk of a compliance visit from HMRC where tax would be collected, together with late payment interest and penalties.
In April 2017, the ‘off-payroll’ rules were implemented in the public sector. These require public sector bodies, including the NHS and BBC, to review contracts held with personal service companies. If the individuals providing the services are operating in the same way as an employee of the organisation, the bodies should deduct tax and national insurance from payments to the personal service company.
The problem HMRC faces in policing the IR35 regime is the sheer number of companies which could fall within it – possibly one million in 2015. The resources needed to review each of these companies would be vast, and when HMRC does decide to take a case to tribunal, the interpretation of employment status can be subjective.
This means that years spent investigating a company may still result in an emphatic loss, as seems to have been the case with Jensal Software Ltd, where HMRC spent nearly five years pursuing around £27,000 of tax.
In response to these difficulties, HMRC’s current off-payroll working rules in the public sector mean the obligation to determine employment status is forced onto the organisation engaging the personal service company and not the personal service company itself. HMRC now needs to visit far fewer public sector organisations.
Into the private sector
The extension of public sector rules to the private sector looks inevitable. Businesses which use limited company contractors will have to put at least some of them through the payroll. This will involve employer’s national insurance and the apprenticeship levy liability, a combined additional cost of 14.3 per cent to the business.
If a business chooses to ignore these new rules, or to be overgenerous in its interpretation of ‘private contractor’, it is at risk of HMRC carrying out a compliance visit and assessing the business for PAYE, interest and penalties for up to six years (although this could be extended to 20 years in the most serious cases).
A more reasonable approach to this area of tax and employment law would have been to have concluded the employment status consultation and then revisited the existing IR35 rules to see if they could have been made more effective. If that was found not to be possible, only then would the off-payroll working rules be considered for the private sector.
The off-payroll consultation closes in August. This leaves the Chancellor time to make an announcement in the Autumn Budget with an implementation date of 6 April 2019. This feels unlikely, however, given the steps the private sector would need to take to prepare for the change. An implementation date of April 2020 or April 2021 is much more likely.
Tim Stovold is head of tax at Kingston Smith