Chancellor Philip Hammond shied away from announcing confirmed action on a number of employment-related tax issues in his Budget speech, but the Treasury has said it will be consulting on how to tackle non-compliance with IR35 intermediaries legislation in the private sector next year
IR35 off-payroll working rules for engagements in the public sector were reformed in April 2017.
In the Red Book accompanying Budget announcements, the Treasury says early indications suggest public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company.
There will be a consultation in 2018 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 which is due to be published early next year.
Julian Sansum, partner at PwC, said there was’ a certain inevitability’ to the announcement, given the imbalance of having one set of rules for the public sector and one for the private sector.
‘The period of consultation will be welcomed by businesses. While the current anomalous situation will be perceived as unfair by many, the contractor workforce is a key component of the UK’s flexible labour market and now is not the time to be jeopardising that. The consultation process should be used to root out areas of real abuse while protecting our flexible contractor support model.
‘The IR35 changes shift the responsibility of how contractors should be taxed from individuals to business. Most big businesses already do these sorts of checks. It's the medium and smaller sized ones it would hit hardest. It's a big compliance headache - most businesses may decide it's easier to put people on payroll,’ Sansum said.
Sansum described the decision to make changes across business as ‘brave’, in light of the fact that the impact on the public sector has not yet been fully reviewed.
The Treasury has also indicated plans to publish a discussion paper as part of the response to Matthew Taylor’s review of employment practices in the modern economy, exploring the case and options for longer-term reform to make the employment status tests for both employment rights and tax clearer.
Mark Groom, tax partner at Deloitte, warned the impact of extending IR35 reforms to the private sector could be potentially 10 times as great as in the private sector, and urged the government to proceed with caution.
‘In order to avoid chaos for contractors and businesses, implementation of any changes should not take place before April 2020 in our view. The main challenges faced by the public sector will apply such as determining status of those employees, as well as significant payroll systems changes.
'It’s reassuring that the government intends to draw on the experience of the public sector implementation.
‘The Chancellor’s wish to extend tax to this group is understandable but personal service companies (PSCs) have their place particularly where individuals pass the test of self-employment and IR35 does not apply. Where it does apply, the cost of employer’s NIC has to be borne by someone. Engagers and contractors will need to negotiate where this cost lands.’