At the October 2018 Budget, HM Treasury and HM Revenue & Customs (HMRC) published the long-awaited outcome of their consultation on reforming off-payroll working in the private sector.
April 2020 Regime
As expected, the 2017 public sector reforms will be extended to the private sector. What is surprising is that the Government have listened to the many representations made from businesses and advisors alike and agreed to delay the implementation until April 2020, rather than coming into play from April 2019 as many originally feared.
During his Budget speech the Chancellor described the measure as a means of tackling perceived high levels of non-compliance with IR35 among the self-employed, stating "Widespread non-compliance also exists in the private sector…”
The changes will see responsibility for determining whether an engagement falls within the ‘IR35’ legislation moving from the worker’s Personal Service Company (PSC) to the end-user, including where PSCs are engaged via an agency.
Where an employment relationship is deemed to exist, the end-user will be responsible for operating PAYE/NIC on payments made to PSCs if it pays them directly. Otherwise, the agency will be responsible based on the end-user’s ‘IR35’ determination.
The changes will be limited to large and medium sized enterprises that engage contractors through PSCs and the current regime will continue for ‘small’ businesses whereby the PSC will continue to determine their own IR35 status.
Rather unhelpfully, it has yet to be confirmed what the criteria is to be considered a ‘small’ business. It has been suggested that ‘small’ may be defined by reference to the Companies Act i.e. where two of the following criteria are met: turnover not more than £10.2 million; balance sheet of not more than £5.1 million; and not more than 50 employees.
Success is in the eye of the beholder
Despite HMRC and the Government’s much lauded success of the public sector implementation, they have confirmed that a further consultation on the new rules is expected early 2019 which will inform the draft legislation for publication in summer 2019.
HMRC have also confirmed they will continue to improve the online Check Employment Status Tool (CEST), and enhance its published guidance prior to April 2020.
Certainly the improvements to CEST and HMRC’s guidance are necessary given that a 14-month investigation conducted by Contractor Calculator revealed that out of 24 cases, the CEST tool made the wrong decision in seven cases whilst 14 cases received the right decision but for the wrong reasons! This reveals the sheer unreliability of the tool in assessing such complex legislation. HMRC have even acknowledged that the CEST tool’s questioning system does not match the complexity of an official IR35 enquiry.
It is also anticipated that the new guidance will address what PSCs should do where they do not agree with their engager’s decision on ‘IR35’ and this will be helpful to try and ensure the same blanket approach of “everyone in” does not happen in the private sector as it did in the public. The effects of which would be disastrous.
There is also an indication that the consultations will explore ‘options for the consequences of businesses failing to use reasonable care in making their decisions’ which could potentially mean sanctions for those businesses who do apply the rules on a ‘blanket’ basis.
The deferral to April 2020 is welcome and should allow HMRC to review and learn from the outcome of a full year’s compliance cycle in the public sector as well as give businesses more time to prepare.
Nonetheless, there are practical steps that businesses should be taking now, including:
- Engaging with key stakeholders
- Identifying potentially impacted workers
- Budgeting for additional costs, including the obvious day rate changes and Employers NIC burden, along with Apprenticeship Levy charges
- Developing new systems and processes to ensure compliance with the changing regime
Our experience of assisting public sector employers to manage similar changes indicates that the timescale involved should not be underestimated and to ensure an efficient implementation, businesses need to begin to act now.
AAB are also planning on hosting a “Business Impact” event following the release of the draft legislation in Summer 2019 to provide practical tips and guidance for businesses. If you are interested in attending, please contact Charlotte.Edwards@aab.uk for further information.
To find out more about Charlotte and the Payroll and Employment Taxes team, click here.