Posted by Gary Mackley-Smith on May 21, 2018
Businesses face chaos from next year as the government forces them in to working out whether any company contractors they engage are employed or self employed and should be on the payroll, mirroring the role out last year of the IR35 disguised remuneration rules into the public sector.
A contractor working through their own limited company has the right to determine their own status and decide whether or not they are caught by IR35. It is for the contractor to determine this, rather than the customer.
However, the government controversially changed the rules in 2017 by forcing customers in the public sector, including academies, to work out whether anyone they engaged via a personal service company was an employee or self employed. To work this out, you have to consider a wide range of unclear case law, imposing a strain on organisations which have no legal expertise.
HM Revenue & Customs (HMRC) unveiled an online status tool to help public organisation in their determinations, but the tool has been criticised for its selective interpretation of case law and for lacking a key aspect of status tests. It is no substitute for a proper assessment of the relevant cases.
The public sector experienced chaos last year as it grappled with the rule change, with some public organisations such as the NHS initially putting all their contractors on the payroll, until they were forced to properly determine their status in each case. Some organisations, including government departments, also reportedly saw IT contractors disengage from contracts rather than being treated as employees. Being treated as an employee for tax purposes does not confer on the contractor any consequent employment rights.
Following on from the public sector role out, HMRC now wants to extend the rule change to the private sector to force companies and recruitment agencies to be responsible for determining whether the contractors they hire are genuinely self-employed. A consultation has been launched until 10 August 2018 setting out various options.
The consultation covers a number of alternative scenarios, including requiring businesses to show that they have carried out the right checks to ensure any off-payroll workers supplied through their labour supply chains are complying with the rules.
Businesses could instead be required to demand contractors provide completed status determinations and to check the results against actual working practices. This could be enforced through a system of penalties, or possibly the denial of tax relief for the costs of unchecked labour, or even the public shaming of those using non-compliant labour. The new regime could see businesses having to keep detailed records of such items as contracts and shift rotas.
Options that could have made life easier for businesses appear to have been ruled out, such as the rules not applying to any contract lasting less than a month. Another route forward could be the phased alignment of tax, National Insurance and employment law, but that appears to be a bridge too far for this government.
Whilst nothing is as yet set in stone, it is likely that finance bill provisions affecting the private sector will surface after the autumn Budget in November 2018, ready to take effect in April 2019. To add to complications for businesses, this will be at the same time as they grapple with changes resulting from Brexit and the start of Making VAT Digital.
If you would like to discuss how the rule changes may affect your business, please contact your usual Bishop Fleming adviser.
Download Bishop Fleming’s Business and Tax Update for Spring 2018 here.
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