Off Payroll working – what next?
The UK tax system recognises services can be provided in different ways, each of which carry their own tax consequences. Since the publication of IR35 which came into effect on 6 April 2000, one of the most contentious areas of dispute between taxpayer and taxman has been the employment status of an individual. That is to say, whether an individual providing his personal services through a limited company was actually self-employed (through his personal service company – “PSC”) or whether he was in fact actually employed and should in fact be taxed as such. The difference in treatment is often significant with the tax treatment of the former being far more favourable to recognise and reward the risk taken of being self-employed i.e. the lack of employee rights and protections. Unfortunately, the rules governing this are complex and very subjective – forget 50 shades of grey think 50,000 shades of grey and therefore in order for the disputes to be resolved, it is necessary for the matter to be decided by the courts, as is evidenced by the recent spate of high profile cases involving TV presenters and celebrities for example. They are all relating to this issue. Historically, the onus was on the individual to determine whether they were genuinely self-employed or whether in fact they would be deemed to be an employee under the IR35 rules. In the event of a dispute, the liability for any additional taxes arising were the liability of the individual and their PSC.
In 2017, HMRC introduced sweeping new rules regarding the employment status of contractors in the public sector in what was billed as levelling the playing field between the employed and the self-employed. Of course, what this actually meant in plain English was to disregard the fact that the self-employed should be rewarded for the risk they took and tax them the same as an employee, thus making operating as a contractor far less attractive – at least in the public sector. The mechanism for doing this was to shift the onus of status and the potential consequential tax liabilities away from the individual and onto the engager. The result of this was typically that affected organisations amended the terms on which they engaged their contractors and paid them through the PAYE system, significantly increasing the tax burden on the individual and obviously reducing the amount of take home pay for the individual. Critically, the private sector was not impacted by these changes. In what ultimately turned out to be perhaps one of the greatest own goals of all time, HMRC saw a mass exodus of their IT department who were affected by the changes. The resultant chaos that ensued was a direct cause of the subsequent delay to the introduction and implementation of their flagship initiative “Making Tax Digital” which would streamline the UK tax system making it much more efficient and cost effective. Oops!
Not to be deterred and seeking to wreak further havoc in this area (well, further levelling the playing field at least) the decision has been made to extend these rules to the private sector with effect from 6 April 2020. So, who is affected? Broadly speaking, you will be affected if you provide personal services through an intermediary, typically your own PSC, to public sector organisations or medium or large sized organisations outside the public sector. Medium and Large organisations for these purposes are defined as those having a turnover of more than £10.2 million, a balance sheet total exceeding £5.1 million and/or more than 50 employees. If you are affected, it is likely that your current customer(s) will seek to deduct PAYE and National Insurance contributions from any amounts due and paid to you after 6 April 2020.
A review of the proposed changes was launched on 7 January 2020, however before we get too excited at this prospect, it is widely considered to be a token gesture. This is on the basis of no independent chair being appointed, it having insufficient time to consider the complex issues (with it being due to be completed by mid-February) and being so close to the implementation date. However, wonders never cease to amaze so we will need to watch this space.
If you are concerned about the changes and how they may affect you, contact us today to discuss what may be done now to mitigate the impact of these changes.