People walking across a suspension bridge

Off-payroll working in the private sector

People walking across a suspension bridge
HMRC issued a consultation on 5 March covering the taxation of engagements with contractors or off-payroll workers which fall within the ‘IR35’ regime in the private sector.  

The government looks set to change the way off-payroll workers in the private sector are taxed from April 2020. You have until 28 May 2019 to contribute to a consultation on how the legislation should look.

The government reformed off-payroll working rules for engagements in the public sector in April 2017 and they are looking to extend them to the private sector from 6 April 2020. This consultation seeks to understand how best to implement the reform in the larger and more diverse private sector. The consultation also sets out how businesses can prepare for reform, and sets out HMRC’s plans to provide education and support for businesses that will be in scope of the changes.

Amongst other things it is proposed that:

  • Where the engager is small, the responsibility to consider the IR35 legislation will still sit with the worker, not the engager, as it does currently in the private sector.
  • Engagers pass down the labour supply chain the reasoning behind the end user’s status determination, as well as the decision itself.
  • Existing anti-avoidance provisions that can apply where there are offshore entities in the labour supply chain will also apply in the new regime.

The problem with IR35

HMRC believes the existing IR35 legislation "is not working effectively, and non-compliance is widespread". It estimates that only 10% of PSCs that should apply the legislation actually do so. 

Draft legislation to implement these changes will be issued in the summer of 2019 as part of draft Finance Bill 2019.

How previous IR35 changes affected the public sector

Public authorities are now responsible for determining the status of workers engaged through PSCs or other intermediaries.

They are also now obliged to deduct income tax and employee National Insurance Contributions (NICs), and account for employer NICs in respect of payments to intermediaries, where the worker would have been an employee if engaged directly.

HMRC commissioned independent research into how public sector organisations implemented the new rules and procedures.

Only half of public authorities surveyed said they found the rules easy to comply with.

A considerable proportion found it difficult to:

Also, contractors were unhappy because switching off-payroll contractors to on-payroll suggests that they should have been accounting for tax under IR35 previously.

How to start preparing for the new legislation

Introducing procedures to deal with this legislation will involve many stakeholders across the organisation, such as HR, finance, legal, procurement and payroll.

Between these functions, firms will need to:

  • identify off-payroll workers
  • identify those who currently work through intermediaries
  • review the processes they have for determining if individuals are employed or self-employed – if you don’t have any, start with these as soon as possible
  • consider specialist advice if there is any uncertainty about the status of your workforce
  • review procurement processes to consider the impact
  • review engagement processes which are not dealt with through procurement
  • amend systems, process maps, internal guidance, contracts and policies to demonstrate that reasonable care has been exercised
  • keep a clear audit trail for presentation to HMRC in the event of a review
  • assess the costs of implementing the proposed changes on existing and future contracts; consider renegotiating rates to make up for the shortfall.

Above all else, the message is clear – start to plan now, as it will undoubtedly make things easier when the new rules are finally determined.

For more information please contact Caroline Harwood or your usual Crowe contact.

Contact us

Caroline Harwood
Caroline Harwood
Partner, Head of Share Plans and Employment Tax