The IR35 rules, introduced in 2000, are aimed at reducing tax avoidance by contractors who provide their services via personal service companies. In broad terms, these rules seek to establish whether those classed as self-employed should actually be deemed to be employees for the purposes of paying tax. HMRC has been concerned for some time that many personal service companies who should be applying the IR35 rules do not.
To address this issue in the public sector, in April 2017 the government transferred the onus of determining whether the rules apply from contractors to end-users, and made end-users responsible for any tax liabilities which might arising as a result of any incorrect assessment. This was followed by an announcement by the Chancellor in his 2018 Spring Statement that the government was considering extending these changes to the private sector.
HMRC subsequently commenced a consultation in May 2018 to assess whether to extend these changes to the entire private sector.
Public Sector Changes
Last year’s changes to the IR35 rules in the public sector were controversial and they continue to be unpopular. Many argue that they have caused confusion and unfairness, and there have been widely reported reliability issues with HMRC’s online employment status tool. This has resulted in some public sector areas operating IR35 on a “blanket” basis whereby anyone providing services via a personal service company is treated as falling within IR35 by default.
Private Sector Consultation
HMRC estimates that the current cost of non-compliance with the existing IR35 regime in the private sector to be in the region of £700 million, and this is projected to increase to £1.2 billion by 2022/23. Around 2 million contractors are likely to be significantly affected if the 2017 public sector reforms are extended, as proposed, to the private sector.
The deadline for responses closed on 10 August 2018.
Next Steps for Private Sector Employers
Last week, it was reported that the Treasury is finalising plans to put these changes into effect in the private sector, and we understand that they could be announced in this month’s Budget. It would therefore be prudent for businesses to start considering staff populations likely to be affected and the changes they may need to make as a consequence as soon as possible.