The off-payroll working rules (commonly known as IR35) seek to ensure that individuals who are engaged through personal service companies (PSCs) by service users (End Users), but who perform roles equivalent to employees, are taxed through payroll in the same way as employees.
Historically, the obligations to operate payroll and to pay associated employer NIC costs have lain with PSCs rather than End Users; however, in 2017, reforms to IR35 were introduced that transferred these obligations to public sector End Users. It has now been announced that these reforms will be extended to the private sector.
Extension of reforms to the private sector
The government made no secret of its view that reforms were needed in the private sector, in view of perceived high levels of non-compliance with IR35.
Earlier in the year, the government launched a consultation process which discussed in detail extending the public sector reforms to the private sector. Our bulletin on the consultation document can be found here.
Rumours were confirmed when Philip Hammond announced in Budget 2018 that the recent public sector reforms will be extended to the private sector, with effect from April 2020. This announcement was accompanied by a short government publication, which can be accessed here.
While Budget 2018 and the related publication contain little detail regarding implementation, the following aspects are significant:
- As is already the case for End Users in the public sector, responsibility for assessing an individual’s employment status and for operating payroll and bearing NIC costs will shift from the PSC to the End User. This was one of the various approaches discussed in the consultation document and is the most burdensome one for End Users.
- The reforms will apply to End Users that are medium-sized or large businesses. Unfortunately, these concepts have yet to be defined.
Impact on businesses
The impact of the private sector IR35 reforms on affected businesses with off-payroll roles is likely to be significant, as these businesses will now be required to be proactive in establishing the employment status of the off-payroll workers they engage. As noted above, this could lead to increased payroll obligations and NIC costs. There may also be additional record-keeping and reporting requirements, as noted earlier this year in the consultation and our bulletin.
Action points for parties likely to be affected
- Prior to implementation, a further consultation on the detailed operation of the rules will be published. This will inform the draft legislation to be included in Finance Bill 2019/20, which is expected to be published in summer 2019. Interested parties may wish to participate in the consultation if they have concerns about the reforms.
- While the reforms will not take effect until April 2020, parties likely to be affected should begin to consider in advance of this date any measures they will introduce in response to the reforms, not least as the reforms are expected to apply in relation to individuals who are engaged prior to April 2020 and whose engagements continue after that date.
We will, of course, monitor new developments to keep clients informed.