consultation to bring change to IR 35

consultation to bring change to IR 35

Off-payroll working has recently attracted headlines in a number of high profile tribunal decisions.

The most notably of these is Christa Ackroyd, the BBC – “Look North” presenter who was recently found to be operating inside IR 35 and ordered to pay over £400,000 in tax and National Insurance Contributions (NICs).

Further headlines followed when other BBC talent similarly found themselves on the payroll. With this background, it might reasonably be supposed that the Government’s consultation issued on 18th May, “Off-payroll working in the private sector”, is a further development of these apparently connected stories – it is of course, although curiously, the Ackroyd case and the BBC’s decision are unconnected.

Off-payroll working simply describes those workers who are not on the PAYE payroll. This is typically because they are engaged through their own personal service company (PSC). The nature of the relationship between the worker provided by the PSC and the engaging client may be identical to that of an employee engaged under a contract of employment, yet the resulting tax may be markedly different. This has long been recognised as unfair and IR 35 (more formally ‘the intermediaries’ legislation’) has been in place since 2000 to address this.

IR 35 does this in two ways. It first requires the PSC (effectively the worker) to determine whether, ignoring the PSC, the nature of the relationship between the worker and the engager is that of an employment. This is the “employment status” test. Christa Ackroyd argued (whether she was aware of it or not) that her relationship with the BBC was not one of employment, such that IR 35 did not apply to her PSC: the tribunal disagreed.

Where an “employment like” relationship is found between the worker and the engager, the second requirement of the IR 35 legislation is that the PSC should operate PAYE and collect employment income and NICs (including employers’ NICs).

Notwithstanding their success with the Ackroyd decision, it is the employment status test that HMRC have a problem with. The language of the Consultation Document can barely conceal HMRC’s frustrations with the current arrangements, under which the worker providing services though the PSC is responsible for determining employment status, thus “providing the means, opportunity and incentive for the wrong amount of tax to be paid”. The loss of revenue is assessed at around £1.2 billion.

Although the Consultation Document offers “options” to address this non-compliance, it is clear from the solutions immediately discounted as “out of scope”, and the barely sketched alternatives to the existing IR 35 rules, that HMRC’s “lead option” is virtually certain to be adopted. This will see responsibility for determining employment status move from the worker to the client, together with the obligation to operate PAYE, where an employment-like relationship is found.

This is already the position with regard to public sector engagers as a result of changes introduced with effect from April 2017 and it was this that dictated the BBC’s decision rather than Ackroyd. It seems inconceivable that a different conclusion will result from the present consultation in the private sector.

Little foresight is required in anticipating the changes that need to be addressed. The timing of the consultation, which closes on August 10th, hints at the possibility, if not likelihood, of the changes coming into effect from April 2019. Engagers therefore need to start identifying off-payroll workers now, review and adopt procedures for determining their employment status and review their engagement processes.

New systems, internal guidance and contracts will involve HR, finance, legal and payroll departments in implementing these changes.

These systems will need to be robust and properly documented as failure to deduct tax in circumstances where an employment like relationship is found, and where insufficient care has been taken, will see the engager liable for the resulting tax costs.

Neil Simpson

Tax Partner at haysmacintrye, Neil advises on a range of tax issues focusing on transactional matters and tax structuring, particularly for early stage businesses and those preparing for, or seeking an exit. He has wide experience of advising on the impact and mitigation of direct taxes in the course of business transactions generally and those related matters as they impact on the owners and their key employees.