Off-payroll rules under the microscope

The government has announced a review of the extension of the off-payroll taxation rules into the private sector. However, it may be too late to prevent their implementation in April, despite growing disquiet.

The rules, known as IR35, are intended to tighten non-compliance with off-payroll working regulations.

They shift responsibility for determining the tax status of contractors from the workers to the end users – in this case, private sector medium and large organisations and charities.

Also known as ‘off-payroll’ the rules allow HMRC to tax sole traders as employees if it deems their working arrangement are akin to regular staff.

In April 2017, responsibility for deciding whether IR35 should apply to self-employed workers shifted from contractor to employer in the public sector.

From April the same change is set to take effect in the private sector. It is a move that has already had an impact.

Some large companies affected by the extension of the off-payroll IR35 rules have started to curtail their use of contractors working through personal service companies (PSCs)

And a survey at the end of last year revealed that as many as 20 per cent of UK businesses are axing contractors completely in order to ensure they are fully tax compliant ahead of the IR35 changes.

The government review follows growing concern over the move among business organisations and politicians.

The taxman says that the purpose of the review is “to address any concerns from businesses and affected individuals about how the rule changes will be implemented”.

There is very little chance that the roll-out faces cancellation. In its statement announcing the move HMRC said that the exercise will determine if any further steps can be taken to “ensure the smooth and successful implementation of the reforms.”

It will also assess whether any additional support is needed to ensure that the self-employed, who are not in scope of the rules, are not impacted.

Uncertainty around the rules has been compounded by several Tax Tribunal cases both won and lost by HMRC.

Groups representing those working through personal service companies have lobbied the government that the implementation of the extension poses serious financial risks to those affected.

One key contentious issue is HMRC’s online employment status test tool. The CEST tool (check employment status for tax) has been widely criticised as lacking nuance and being skewed towards employment status rather than self-employed.

In 15 per cent of cases, the tool was unable to provide a determination. In December, HMRC released an update to the tool, including a raft of new and updated questions, with feedback invited from over 300 stakeholders.

The government review will be carried out until mid-February, and will include meetings with stakeholder groups of contractors and businesses.

Analysis of the impact of the initial roll-out to the public sector will be included, as well an evaluation of the revised CEST tool.

With only weeks before the new tax year, this intervention may create more uncertainty for those affected by the off-payroll reforms.

If you have any questions about your status, please contact me on 01772 430000