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Markel Tax

27 Nov 2017

Consultation on extending off payroll rules to the private sector? Yes, please!

The off payroll rules in the public sector have created unnecessary problems for contractors, and most importantly, the public sector itself. The full ramifications and (hopefully) unintended consequences have yet to take full effect. We ask HMRC to consult properly and listen before legislating again.

From the Autumn Budget documents, under 4.3 Income Tax and National Insurance, there is a paragraph referencing off payroll working in the private sector. It advises that the government has “reformed” the off payroll working rules (known as IR35) for engagements in the public sector in April 2017. I think we’d all accept that the rules have been changed, but why anyone would think that handing the tax status decision to public authorities without any tax expertise is ‘reform’ is a bit of a stretch. 

The paragraph says: “Early indications are that public sector compliance is increasing as a result” – a recentSunday Times article suggested that the Chancellor can expect an additional £265m in 2017/18 but whether it is 'compliance' because people are paying more tax due to public sector bodies simply deeming everyone as 'caught' is also highly questionable.

Whether you agree with the current off payroll working rules in the public sector or not, there is no denying the logic that we need one set of rules on IR35 for all contractors. Not least from the public sector’s point of view,a level playing field is desperately needed. There is a great deal of evidence that some of the best contracting talent has headed off to the greener grass in the private sector, resulting in delayed project delivery including HMRC digitisation projects.

So, it is no surprise that a possible next step would be to extend the reforms to the private sector, although we have been saying for the last six months and in all the Markel Tax seminars that we always believed that April 2018 was too soon for the extension of the rules to the private sector. In fact, we also predicted – correctly as it turns out – that the government would need to consult.

The paragraph ends: “Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018.”

Never have truer words been written and we hope that the government addresses some of the following points:

  • ​Overhauling the Check of Employment Status Test (CEST) for tax so that you can’t have a situation where an NHS Trust determines an engagement as ‘caught’ but the contractor taking the same test gets a ‘not caught’.
  • Furthermore, considering 'mutuality of obligations' as part of the test, we are not aware that the three key status indicators arising from Ready Mixed Concrete have changed.
  • Changing the legislation so that taking reasonable care applies equally to engagements which have been deemed caught by the engager, as it would to ones that are not caught.
  • Clear guidance about the consequences of being caught i.e. if the client can only afford a particular day rate, that this will include employer’s national insurance thus reducing the actual day rate paid to the PSC. It is from that lower rate that the payment will suffer tax and NICs; also that travel and subsistence cannot be claimed. Contractors need to know the true cost.
  • Clarity about how the PSC’s accounts should be drawn up. Simply stating that turnover is reduced from the amount invoiced to the net taxed amount actually received goes against all generally accepted accounting principles. It also means that the contractor appears to be charging VAT at a rate closer to 30%.
  • An explanation of how the costs of running a company – including company pension contributions – can be claimed if the 5% notional allowance is also removed in the private sector and all of the PSC’s engagements will be caught.

So, we welcome a consultation and will be responding when it is issued. But, as ever, the question is will the government listen?
Tagged IR35
Next article in series

27 Nov 2017

Autumn Budget 2017: Disguised remuneration – a further update

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