Chancellor Philip Hammond delivered his Autumn budget on 22 November 2017. The most significant development for employers was buried under the unassuming heading of “Off-payroll working in the private sector”. Off payroll working refers to the common arrangement whereby an individual provides their services through a “personal services company” – which are subject to the tax rules almost universally referred to “IR35”.
IR35 is a set of anti-avoidance provisions. They provide that where the individual would be an employee of the end user if it were not for the fact that they provide their services through a company, then they are treated for tax and national insurance purposes (very broadly) as if they were directly engaged. Significantly this means that Treasury does not miss out on national insurance – at a marginal rate of 15.8% (taking both employer and employee rates into account).
The problem with IR35 from the Treasury’s perspective has always been that the risk of IR35 applying or not rests on the individual’s company rather than the end user – you, our client. It also very resource intensive to investigate the large number of IR35 type arrangements that exist. In contrast, one PAYE compliance investigation can deal with hundreds of employees and employers tend to be less risk adverse.
Following controversary about high profile public figures using personal service companies, from April 2017, payments made by the public sector have been subject to a separate regime. The effect of this is to require the end user to determine if IR35 applies and, if so, to operate payroll.
The budget statement says that the government will “carefully consult on how to tackle non-compliance in the private sector drawing on the experience in the public sector”. Cutting through the politic speak, the Treasury are very pleased indeed with all the extra tax raised in the public sector as a result of the IR35 test being applied in a more risk adverse way and they want to implement in same the private sector. But Hammond remembers all the flack that he got in the Spring budget when he announced – and then had to drop – proposed changes to national insurance rates for the self-employed. His problem being that he had rather given the impression - at the election – that tax rates would not rise. So, in other words, just as soon as the government thinks they can get away with it politically then these changes will happen.
The biggest question will be whether the reforms apply just to new contracts or (as in the public sector) to old contracts as well. Watch this space.