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Private Sector IR35 & Off Payroll Working – Tax & April 2020

Author

Paul McKay

A vastly experienced tax professional with over 35 years’ experience of advising PLCs, not for profits but predominantly SME/OMBs and professional advisers on most aspects of tax. Paul has a broad background including working for big 4, tax boutiques and a large local practice, and joined ETC Tax in October 2017.

IR35 & THE PRIVATE SECTOR

It has been announced that the IR35 provisions relating to the public sector will be introduced into the private sector.

The proposal is subject to consultation and the precise details are unclear, however, it might be useful to look at the public sector provisions to see what might prove to be the case in the public sector.

The public sector provisions were introduced as an extension to the initial IR35 legislation (found at Part 2 Ch 8) by the introduction of a new chapter 10 and the extension of the NIC regulations.

To understand the context, background and objectives of the public sector provisions it is first necessary to understand the original IR35 provisions and their perceived failure to achieve their initial objectives.

Understanding IR35 – From 1999 through to 2011, 2016 & 2017 and Beyond…

The original provisions were introduced by Budget 1999 to counter “tax avoidance by the use of personal service companies “(initial details of the announcement were in Budget day press release IR35). The legislation was introduced by Finance Act 2000 and the current provisions are a consolidation of the initial provisions.

It is difficult to assemble any reliable data as to the effectiveness of the legislation. HMRC have not published direct data and have generally given little or no information in response to published Freedom of Information requests.

A 2011 Fof I request revealed that the number of cases reviewed in 2011 was 23 a fall from 158 in 2007, with yield running at no more than £1m to £2m a year possibly less than 1% of the projected yield. In 2017 HMRC initiated a consultation to possibly extend the public sector provision into the private sector and at that time estimated that only 10% of applicable private sector contractors were fully complying with an estimated tax loss approaching £1b. By any judgement the legislation has failed to meet its objectives.

At its core the legislation requires a judgement to be made as to possible employment status (for tax purposes). Both the general and tax law relating to employment (this is more or less exclusively case law based and there is no general definition of employment or the division between self and employed status in legislation) has struggled to keep pace with developments in the work place and in particular the “gig economy”.

It was against this background that it was announced at Budget 2016 that a consultation would be put in place to consider reforms to the IR35 provisions in the public score. Following this a consultation took place in summer 2016 and the intention to change the rules was contained in the Autumn Statement 2016.

The legislation was finally contained in Finance Act 2017 Sch 1 with the legislation applying from 6 April 2017.

To facilitate compliance the broad thrust of the legislation is to place responsibility for determining if the provisions apply and if they do, applying PAYE/ NIC to the payments upon the client.

As noted earlier it is initially necessary to have an understanding of the IR35 provisions. Broadly these target those who would have been employees of their client had there been no intermediary (typically a personal service company but not exclusively) between the individual and the client. In essence a look through is applied, what is the substance of the arrangements.

Although not articulated in this way it is the typical tax consideration – the substance of the arrangement is more relevant than its form.

Such information as is available suggests that public bodies are applying PAYE in the majority of cases and taking a defensive stance.

With the “employer” being liable for any retrospective tax liability arising through a failure to apply PAYE such a stance is understandable.

If the private sector rules result in the same position no doubt HMRC will regard the job as finally (20 years on) done but the impact on contractors and indeed their “employers” will be significant.

For more info on IR35 and the private sector contact our helpful team of tax advisers or be sure to read more about IR35 below…

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