Written by FCSA Business Partner, Larsen Howie.
Is it inevitable that ‘off-payroll’ rules will be extended, and how does it affect agencies?
April 2017 saw the introduction of the ‘off-payroll’ rules for engagements in the public sector, as part of IR35 reforms. The legislation imposes a requirement on the end client i.e. the public sector body, to determine if IR35 applies, thus taking that decision out of the contractor’s hands. If IR35 does apply, then payments made to the contractor are treated as if they were employment income of the worker and subject to deduction of tax and NIC.
Now, as here is the scary thing for agencies… the public sector organisation then has an obligation to deduct tax and NIC from the workers’ fee and pay only the net over to the contractors company, adding any VAT to that net figure. However, where that organisation uses an agency, the responsibility for operating PAYE shifts to that agency.
Whilst the employment status tests for determining a freelancer’s IR35 position remain unchanged, end clients are able to use HMRC’s online status indicator tool CEST (Check Employment Status for Tax) to help them make that decision.
Unsurprisingly, HMRC believes the reforms have been a success and are keen to extend the same rules to the private sector, citing the estimated cost of IR35 ‘non-compliance’ as being £1.2 billion by 2022/23 as being a strong reason for doing so. Many therefore were expecting last year’s Autumn Budget to confirm that the reforms would be spread to the private sector, but, instead, it was announced that the government was keen to assure the contracting community that they would take account of the needs of business and individuals whom the changes would affect. This will be done by consultation which we can expect anytime soon.
It could be that HMRC has realised that the private sector may be a harder nut to crack and will not be so intimidated as the public sector. That an end client would suddenly become responsible for deducting PAYE and NIC and also paying employers NIC where a contract is deemed to fall within IR35, may be sufficient to sharpen the private sectors focus and not be so ready to roll over and die for HMRC.
Assuming that the consultation process will not be a rushed job, then any proposed changes to legislation are likely to happen in April 2019 at the earliest.
There is already evidence that the public sector has experienced an exodus of freelancers and a rise in contractor rates as a direct result of the new rules. Much needed skills and expertise are being lost and it is vital that the private sector does not suffer the same fate.
Agencies and their clients need to get involved in the processes of IR35 education and awareness, and consultation in presenting a compelling case to government that any attempt to extend the ‘off-payroll’ rules to the private sector will have a significant economic impact and result in a withdrawal of skills from the labour market. We would advise all those in the contracting marketplace to participate in the consultation process. The fate of contracting is at stake, so don’t let HMRC dictate it.
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