In April 2017, HMRC introduced changes to “off payroll working” in the public sector, which removed the IR35 decision-making from the individual operating through their Personal Service Company (PSC) and required the public sector body to determine the IR35 status of an engagement.
Although that was not the full story because the new legislation found at ITEPA 2003, Part 2 Chapter 10 introduced the concept of the ‘fee-payer’, which is the entity which pays the PSC. Where the engagement is direct with the public sector body that body would be liable for any incorrect status decisions, but where there were agencies in the chain, the agency immediately above the PSC in the contractual chain would become responsible – providing the public body had taken reasonable care and met the legislative requirements for providing information requested of it by the agency it engaged in the timeframes set down.
While no agency would be likely to quibble with a ‘caught by IR35’ decision, it does mean that agencies wishing to avoid any liability would be more likely to challenge the decision to pay gross. Effectively, agencies have become fee-payer and quasi decision-maker. This coupled with the blanket decisions made by many public bodies to treat engagements has caught, no doubt contributed to HMRC’s pronouncements in the May off Payroll consultation had contributed £410 million to the Treasury’s coffers in the period from April 2017 to February 2018, which has been upgraded to £500 million.
However, the real sting in the tail for those operating through PSCs in the public sector was the removal of the flat rate 5% deduction from the PSCs income for general expenses incurred in the running of the PSCs business. If all of your engagements were caught, then all of the income would be accounted for as either tax/NICs or net pay; i.e. nothing to set running costs against.
As a consequence, many contractors closed their companies and became umbrella employees or left for the private sector. Although strenuously denied in the Consultation, there is sufficient anecdotal evidence to suggest that contractors leaving the public sector had a negative effect on many public sector projects.
The concern was that if the public sector rules ware brought into the private sector, the cost to business in terms of administration and perhaps increased temporary resource costs might have a debilitating effect on the economy at the same time as the impact of Brexit was beginning to be felt.
The Government has decided that the rules will come into the private sector, but not until April 2020 and then only for “large and medium businesses” with the 1.5 million smallest businesses to remain unaffected by the change.
The Budget Brief also clarified that the reform will not be retrospective and “HMRC will focus its efforts on ensuring businesses comply with the reform rather than focus on historic cases”. The Brief also adds that HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years.”
The Brief concludes that there will be “further consultation on the detailed operation of the reform” to be published in the coming months, which will “inform the Draft Finance Bill legislation expected to be published in Summer 2019”.
The initial reaction will be relief: contractors who were preparing for their post-tax earnings to be slashed; agencies and end clients wondering how to enforce the legislation.
However, for medium and large businesses this only represents a reprieve, albeit the first item on their agenda will be how the consultation will seek to define what ‘medium and large businesses’ are for the purpose of this legislation. Moreover, is this a reference purely to the end client engager or will it affect agencies in the contractual chain?
Arguably, for small businesses this is good news, although one wonders if many had appreciated that there was an issue? However, one of the issues cited in every HMRC pronouncement on off-payroll working has been that it is only fair that two individuals working in the same way pay broadly the same income tax and National Insurance contributions (NICs), even if one of them works through a company.
This ‘exemption’ for the 1.5 million smallest companies doesn’t seem to meet that objective.