Crackdown on IR35

Crackdown on IR35

There are two sides to every argument, but when one party to the argument is HMRC, I sit up and take notice.  Over the past few years HMRC has developed teeth, and they are sharp.

 

The newest area of “non compliance” – their words not mine, to be bought into focus is that of personal service companies (“PSC”), broadly where an individual forms a company to provide their expertise to one or more customers.

We already have tax rules which tax income differently dependent on the relationship between the individual providing the services and the client company.  In high level terms, if the PSC were not interposed, would the individual be an employee or self employed.  The tax take is generally higher where the conclusion errs towards “employment” rather than “self employment”.  These rules are generically known as IR35.

The key point here is the nature of the relationship between the individual providing services and client company, and the tax analysis of this, regardless of HMRC’s posturing, is far from clear.  There are a number of high profile tax cases currently working their way through the system dealing with this issue which are based on current practise and case law.

 

In February however an extensive consultation commenced looking both at tax employment status as well as employment status for employment law purposes, and so the underlying arguments around tax employment status could very well change in the foreseeable future.  All we can do at present is review cases based on current practise and case law.

My personal view is that the key difference between employment and self-employment should come down to risk.  As an employee, if I muck up and take 3 days to do a 1 day job, I am unlikely to suffer immediate financial loss (I might not be promoted or get a pay rise but that is a different matter).  If a self employed person quotes for a day’s work, and it takes 3 days, they are only paid for a day so they carry commercial risk.  Rarely however is life as clear cut as this and there is often considerable uncertainty.

The current consultation skims over this key issue of what is self employment and goes straight to the jugular with the assumption that 1/3 of PSC’s are not currently compliant (in other words if HRMC chose, they could enquire into their affairs and charge additional tax, interest and penalties).  Non compliance with tax law is a serious matter.    HMRC are of the view that this “non compliance” currently costs £700k a year in lost tax estimated to grow to £1.2 billion in the next 5 years.

The favoured route to eliminate this tax avoidance is to adopt the same approach taken for public sector employers and make the employing company responsible for deducting paye tax and NIC from PSCs providing their services to it if they are caught by the legislation.  Not unsurprisingly the public sector companies involved have we understand anecdotally, taken a risk adverse view of this and this has, from HMRC’s perspective been a successful change.  The view of  public sector managers  trying to recruit in a hard labour market or of contractors negotiating rates with public sector client companies is not necessarily quite as positive.

There are two other suggested solutions to deal with the “non compliance” issue, being a risk assessed approach for the ultimate client company or a requirement for more detailed record keeping, but I strongly suspect that the first approach will ultimately be bought into force.

Consultation responses are requested by 10 August 2018, and this may be in  time to bring new legislation in by 5 April 2019.

 

Our view

Whilst not a “done deal” change is coming and anyone operating through a PSC should be preparing for a future in which they pay tax and broadly the same time and in the same way as an employee of their ultimate customer or customers.  Equally industries who use consultants on a regular basis also need to prepare themselves for the possibility that they will have additional NIC costs of continuing to use many of these consultant companies.  Whilst still important to review every client/consultant relationship under current rules to ensure compliance, a compliant position now may well not remain so under new rules that could be with us in a very short space of time. 

Both companies using PSCs and individual’s providing their services via PSCs need to be ready for the financial impact of possible reforms.  I will be happy to discuss the changing landscape with both effected parties and help you prepare for the future.

Call our Tax Director, Mary Tierney today on 0845 330 3200 for more details and guidance.