On 18th May 2018, HMRC published their consultation paper ‘Off-payroll working in the private sector’.
A summary of the keys recommendations were:
- Extending public sector reform to the private sector where the end client would determine the status of the contract (determining whether the worker would have been regarded as an employee for income tax and NICs purposes if they had been engaged directly).
- Requiring businesses (end clients) to secure their labour supply chain and ensure it is compliant. For example, where workers are being supplied, agency rules and employment intermediary reporting are applied correctly.
- Additional record keeping in the labour supply chain.
Options excluded at this stage include:
- Contract duration rules e.g. if a contract was less than one month it would automatically be excluded.
- Freelancer Limited Company.
- The end client pays the employer NICs.
- Flat rate withholding tax.
The closing date for comment is 10th August. We are working on the basis that any changes will be announced in the Autumn Budget with implementation in April 2019.
(A) What does this mean for private sector contractors?
It is looking very probable that HMRC are progressing with the same approach as undertaken in the public sector. Under this approach the end client will have to determine the status of the contract. The fee-payer (the end client, agency or other third party who is responsible for paying the worker’s intermediary) must:
- calculate a deemed direct payment to account for employment taxes associated with the contract
- deduct those taxes from the payment to the worker’s intermediary
- report to HM Revenue and Customs (HMRC) through Real Time Information (RTI) the taxes deducted
- pay the relevant employers’ NICs
For example, if a contractor was on a day rate of £500 per day, the 13.8% employers Ni would be removed leaving a net day rate of £439.37. This rate is then used for the payroll calculation and subject to PAYE and employees NI.
As with the public sector, it is likely that the 5% administration charge allowable in the contractor’s limited company (PSC) under IR35 will no longer apply i.e. there is no point in using the PSC in this type of arrangement.
As HMRC have indicated in their consultation document there is likely to be further legislation applied to the end client where they need to audit their labour supply chain to ensure it is compliant with the new legislation. This is to ensure that all agencies and intermediaries in the supply chain adhere to the regulation.
(B) Will all end clients have to apply the off payroll rules?
This will depend on the new legislation. End clients may still have contracts that genuinely fall outside IR35 encompassing the key attributes of:
- Personal service
- Mutuality of obligation (MOO)
With potential penalties on the end clients for non compliance, it will be interesting to see how many of the larger employers would take the risk of assessing their contracts outside IR35.
(C) What will I do with my limited company (PSC) in the event that my contracts after April 2019 fall inside IR35?
There are a lot of factors to consider:
- The value of your company
- The contractor’s personal tax position
- The trading status of the company
If the legislation implements in April 2019 we will be assisting contractors through tax efficient and compliant solutions. Please contact us for further information.