HMRC has been concerned about individuals working through personal service companies (“PSC”) and similar arrangements for over 2 decades – viewing it as a way of avoiding PAYE and Class 1 NIC, when, in HMRC’s view, the individual is acting as an employee save for the PSC in the middle.
The government reformed the off-payroll working rules for engagements in the public sector in April 2017, making the responsibility for paying this tax transfer to the person paying the PSC, i.e. public bodies such as the NHS, even if the PSC is registered for VAT.
The government believes that public sector compliance is increasing as a result despite the initial challenges and inclusion of workers that no one anticipated! There was initial concerns that the government would take their perceived successes and roll it straight out to the private sector without any consultation or discussions with any of the key stakeholders.
Instead however, at the November 2017 Budget they have confirmed that they will carry out a full consultation on the possibility of these rules being extended to the private sector.
If the decision is made to go ahead with implementing the off-payroll working rules to contractors and engaging companies in the private sector, there are likely to be widespread changes to the current landscape of freelancing in the UK.
No longer would an individual earning £100,000 a year as a contractor be paying less tax than his counterpart working as a full time member of staff. Which would beg the question as to why anyone would choose to remain as a contractor without a significant rise in day rate, or agreement that their engager will pay the employer NI liability, especially in view of the obvious fact that there is little to no job security, and lack of other associated employment rights.
There may be other practical repercussions, for example, the UK’s flexible workforce is likely to be significantly reduced, and the large consultancy providers are likely to up the charges for ad-hoc professionals to ensure their day rate remains at a comparable level, and their fees are covered in light of changes in supply and demand. How this will benefit the UK economy moving forward is unclear, especially when coupled with the likelihood that the tax take will decrease as people move from lucrative freelancing to lower paid permanent work.
It would be hoped that following a detailed consultation with private industry experts, a common sense approach is taken, whereby weight is given to the fact that many of those working in the oil and gas sector as contractors, are doing so because they have to, not because they want to.
The struggling nature of this industry over the last two years has led to widespread cuts, which has seen increasingly cash strapped companies turn to PSCs for support as and when required. This provides the main company with significant latitude to maximise efficiency by contracting in the necessary expertise on demand, without having to worry about holiday pay, pension contributions, and potential redundancy settlements. The harsh reality being that if the individual wasn’t working as a contractor he or she would likely not be working at all, with this mutually beneficial arrangement helping the industry remain competitive against a challenging backdrop of lower for longer oil.
As previously outlined, if companies were forced to operate PAYE and Employers Class 1 NIC, there would likely be a reduction in contractor utilisation, and overall employment. At least under the current rules HMRC are receiving some portion of tax, rather than none at all. This opinion appears to be echoed amongst both IT and Oil and Gas experts, with the widespread consensus being that a further IR35 red tape burden would have negative consequences for UK Plc. As such, it can only be hoped that any proposed changes are made following careful consideration and after due care and consideration to the concerns being expressed by key stakeholders.
Here at AAB, we will be monitoring the forthcoming developments with interest over the next few months, and will look to provide an update in due course. In the meantime, if you have any questions or concerns regarding IR35 compliance and the potential changes please get in touch with Charlotte Stewart (email@example.com) or your usual AAB contact.