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27 June 2018
The government has launched a consultation to tackle non-compliance with the IR35 regime in the private sector.
If the main proposal in the consultation document is implemented, businesses engaging individuals who supply their services via their own company or partnership (intermediary) will be responsible for determining whether the IR35 rules apply. If the business determines that IR35 applies, the party paying the intermediary will be responsible for operating pay-as-you-earn (PAYE) tax and national insurance contributions (NICs) on the fees that it pays to the intermediary.
Individuals often chose to supply their services through a personal services company (PSC) – that is, a company controlled and owned by the individual. In addition to limited liability protection, using a PSC may enable the individual to save tax by paying dividends rather than salary.
Concerned by the perceived loss of tax through the use of PSCs, Her Majesty's Revenue and Customs (HMRC) introduced IR35. In broad terms, IR35 applies when an individual personally provides services to a client via an intermediary and:
If IR35 applies, the intermediary is required to operate PAYE and account for employer NICs on deemed employment income (broadly, the fees received by the PSC excluding value added tax (VAT), minus a 5% deduction for notional expenses).
Under current law, a private sector business engaging an individual via a UK intermediary will have no PAYE or NIC liabilities in relation to that arrangement, provided that there is a valid contract between the parties and the parties act in accordance with that contract.
From 6 April 2017, where an individual provides their personal service through an intermediary directly or indirectly to a public authority client (essentially an organisation to which the Freedom of Information Act 2000 or Freedom of Information (Scotland) Act 2002 applies), the IR35 rules were modified to ensure the following:
In the new consultation, the government is primarily seeking views on extending the IR35 rules that currently apply in the public sector to the private sector. While the consultation moots two alternatives to this primary proposal, it essentially concludes that neither are viable. The alternatives are:
Given the lack of viable alternatives, it is likely that the public sector IR35 rules will be extended to the private sector.
It is hoped that the new rules will not be implemented in the private sector until April 2020, in order to give businesses time to prepare. However, an April 2019 start date cannot be ruled out.
Although extending the public sector IR35 rules to the private sector will have the advantage of levelling the playing field between the public and private sectors, the implications for the private sector are significant and will require a substantial investment in terms of both cost and time.
However, the private sector can learn from the public sector's experience of implementing the rules. The following issues have been encountered in the public sector:
Businesses in the private sector using individuals who supply their labour via an intermediary should begin to consider the preparations that they need to make for the likely implementation of the new rules. Preparations may include:
The consultation remains open until 10 August 2018.
For further information on this topic please contact Victoria Goode at Lewis Silkin by telephone (+44 20 7074 8000) or email (firstname.lastname@example.org). The Lewis Silkin website can be accessed at www.lewissilkin.com.
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