IR35 and Off-Payroll Workers

The HMRC, the Courts and the Government have been trying for decades to find a workable definition of what constitutes employment that everyone can understand and apply in practice.

It is lamentable and no credit to the authorities and Courts concerned, that a simple and workable definition has not been agreed upon to date.

Before the year 2000, the issue of employment status was only a relatively minor concern for the HMRC in terms of loss of revenue. The rapid growth of the personal service company (PSC) contracting sector in the last two decades, however, highlighted an emerging and unfair taxation issue as far as the HMRC was concerned. A high-salaried employee who paid income tax and national insurance under the employer's PAYE scheme could stop working on Friday, and return on Monday as a contractor to do the same job on a higher fee where both the employer and the contractor paid far less tax than before.

For the last 19 years the HMRC have introduced a series of anti-avoidance taxation measures (IR35) to reverse the significant tax advantage of a PSC-working arrangement. The HMRC may have the moral high-ground in terms of every worker should pay their fair share of tax, but as they have tried to secure that lofty ideal, the measures they have introduced have trampled over Company Law and ended up more recently breaking the long-held principle that the same income should not be taxed twice when the dividend tax was introduced under personal Self Assessment rules.

Whilst the new dividend tax succeeded in significantly reducing the tax advantage of running a PSC, it is fair to say the vast majority of PSC directors have continued to ignore the HMRC's anti-avoidance measures. The HMRC do not have the resources to enforce the rules and although a number of HMRC prosecutions have been brought before the Courts, the decisions have often only served to confuse matters even further.

So what does a frustrated HMRC do when they cannot effectively enforce a set of tax collection regulations against a group of influential and well-represented tax-payers who openly defy them? They take the decision of what tax is paid on the income they earn away from the contractors, and make the engagers responsible for making the decision over employment status and more importantly accounting for the tax the HMRC wish to see collected in. Simple … and it works.

The HMRC have already successfully implemented the Off-Payroll regulations requiring public-service employers to account for tax at source for their PSC consultants. You may recall last year's news stories about all the high-profile BBC personalties who were caught up in the rule change, not to mention a string of senior civil servant consultants in various governmental departments who had previously enjoyed the tax breaks of providing their services through a PSC.

We state 'successful' only in terms of the HMRC having secured their objective of ensuring a PSC director pays exactly the same amount of tax as their directly employed counterpart. The underlying question of whether the individuals who provide their services to a public-service company is doing so under a contract of service or a contract for service remains. In these circumstances it really doesn't matter, because the HR departments of public service operations will be risk-adverse and rather than assume the impossible task of accurately deciding employment status on a case by case basis, they will just turn round and state if you want the job, these are the terms under which we will pay you under deduction of tax at source.

We actually conclude this is a positive step forward. There will always be a need for the public-service bodies to engage specialised consultants on short-term contracts. If you contract to a public service engager you know exactly where you stand on the tax front and normal supply and demand market-forces will work to see the fees offered to secure the best consultants rise to off-set the tax advantages lost.

It follows that sooner or later, the Chancellor will announce in a future Budget that the Off-Payroll regulations will be extended to all private firms and companies who engage contractors in the course of their normal business activities.

When the rules are extended to all employers, there will no doubt be a brief period of wailing and gnashing of teeth, but private employers will be even more risk averse than the public-sector. They will take the safest option and tax at source, which will force PSC consultants to either accept the new status-qua or go back into full-time employment.

There is one up-side to all this. All the time wasted on writing about IR35 will come to an end as the legislation and rule book is consigned to the back-water of the HMRC's guidance manuals. An event, we suspect, that will be celebrated by both tax inspectors and tax-payers alike.

Call us on 01202 482121 if you recognise you have an issue arising from IR35 or Off-Payroll Workers. You need to clarify your policy on engaging workers now to help avoid the potential of being assessed to back-duty tax if and when the new rules come into effect.

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