Off payroll rules extended to private companies
It’s a concept that in its simplest terms is not that difficult to understand…
- If you have a contract for services – as in, the key focus of the contract is on the services to be provided, you can be paid for providing those services outside of PAYE.
- If you have a contract of service – as in, the key focus of the contract is to ensure that you personally offer your services to a company – you need to be paid through PAYE.
Over the years, people have used contracts for services to cover up what are actually contracts of service and in particular this has been done through the use of personal service companies (PSCs). The individual who is carrying out the work through his or her PSC will be paid the gross value for that work, and they can manage that money (and the tax due on it) in more “efficient” ways…
Once the money is paid by a company to a PSC, the company no longer has control over how the PSC accounts for tax on that sum so can (to an extent) forget about how that money should be taxed. If HMRC chases a company for unpaid tax and NI on money that has been paid via a PSC, there is normally a clause in the contract between the company and the PSC which requires the PSC to indemnify the company for these costs. As a result, the government has estimated that in 90% of cases within the private sector the off-payroll working rules (also known as “IR35”) are not being applied correctly.
The truth of the matter is, unless the relationship between the company and the individual that is being engaged through a PSC turns sour (in which case, claims relating to employment/worker status and the accompanying claims for unpaid holiday pay, minimum wage etc. come into play) companies can, most of the time, get away with engaging individuals through PSCs even in circumstances where they should perhaps be engaged as workers or contractors.
HMRC aren’t happy with this.
IR35 has been in place since 2000, but for the reasons set out above, it has not been particularly effective. From April 2020, the company engaging with a PSC will need to make its own determination as to whether or not but for the PSC, they would effectively be engaging an individual directly under a contract of service and should therefore be making PAYE deductions from their pay. This measure is expected to impact 170,000 individuals working through their own company, who would be employees if they were engaged by the contracting company directly.
This is something that is already in place for the public sector. It has proved to be effective in improving compliance, and the government estimates the reform raised an additional £550 million in Income Tax and National Insurance contributions in the first 12 months after it was introduced.
However, the looming implementation date for private companies is already causing a bit of a panic for those that routinely engage individuals through PSCs. Of particular note, Barclays bank has announced this month that it will no longer engage contractors through limited companies and will instead be shifting all of its contractors onto the PAYE system. In response, Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE) has said:
IR35 is a nightmarishly complex piece of legislation – so complex that Barclays has decided it cannot manage the risk of falling foul of it. The approach from Barclays makes a mockery of the government’s claim that the genuinely self-employed won’t be affected by the April 2020 rules.
The approach taken by Barclays somewhat extreme and possibly ill advised – unless of course having undertaken an assessment, they are effectively admitting that all of their contractors engaged through PSCs should have been engaged directly (and one wonders what HMRC will make of that).
It’s not a very helpful stance for Barclays to adopt either. As Andy Chamberlain points out, if as a result of the new rules coming into force companies become frightened of engaging the genuinely self-employed, that could itself cause massive problems both for contractors and industry generally.
Rather than running scared, our advice to businesses that are concerned about the upcoming changes is to undertake a review of your self employed contractors and the terms upon which you are engaging them in advance of the new rules coming into force. If an individual is genuinely self employed, their contract should reflect this. If an individual is actually more akin to a worker or an employee by virtue of how they work in practice, they should be engaged on appropriate terms. Otherwise, if you want to continue engaging them as consultants, you will need to re-evaluate how these individuals are used by your business.
For more information about off-payroll working or for support in undertaking a review of how you are using contractors in your business, please contact our employment team.
Claire Knowles - Partner
Mark Alaszewski - Associate
Rebecca Mahon - Solicitor
Amelia Wheatstone - Solicitor
Adam McGlynn - Trainee Solicitor