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Business Tax  •  Personal tax

What’s the impact of new private sector IR35 reforms?

By RJP LLP on 26 November 2018

According to HMRC, if existing tax rules for private sector contractors were left untouched, it would cost the Treasury £1.3bn a year by 2023-24 in lost revenues. This is because these workers do not incur employers’ NICs and other employment related taxes as they typically work through limited companies and take their remuneration in the form of dividends.

It’s a lot of money for the Government to be losing so as expected, the off-payroll compliance rules imposed upon public sector organisations from April 2017 were extended to the private sector in last month’s Budget, as a replacement to the IR35 rules which have proved largely ineffective. This change came despite widespread concerns raised during a three-month consultation process over the financial implications for contractors and organisations alike.

The new off-payroll rules will take effect from 6 April 2020 and the Government says that the time available until then should allow businesses to review their existing contracts and make any changes needed to systems and processes.

 

The future of contracting in the private sector

What these changes essentially mean is that the compliance responsibility for contractors who are working for private organisations through limited companies will now reside with the organisation, agency or other third party engaging the worker, rather than with the individual worker. Although on the surface this may not appear a big deal, some experts are saying they represent “the most significant change to the operation of employment taxes for many years” and will have a big impact on organisations and their contractors.

In practical terms, it means that some contractors are likely to find themselves treated as employees and taxed at source, because the organisations engaging them do not want any repercussions from HMRC. Given that most contractors tend to be higher or even additional rate tax payers, this potentially has big financial implications for both the worker and for the employing organisation. Even though the dividend tax breaks for close company directors have slowly been eroded, it still tends to be more tax efficient for a contractor or consultant to operate through a limited company than either dis-incorporate or join the payroll as an employee.

Added to this, many organisations prefer to engage contractors for short term projects to get access to their specialist skills because it can be far more cost effective than increasing their employee headcount. These new rules create an additional compliance burden and as a result, HMRC are providing support and guidance.

 

Extra tax to pay

Organisations will need to review their processes and potentially add to existing payroll management operations. There will also be cost implications for businesses who use contractors that fall within the new off-payroll rules, because they will be liable for employers’ NICs and potentially also the Apprenticeship Levy. This amounts to an extra 14.3%, which will be chargeable on contractor fees. In addition, businesses will need to make the necessary changes to their systems and processes, which will have an associated cost.

 

Are there any exemptions?

HMRC has already confirmed that ‘smaller organisations’ will be exempt and can continue operating as they have been. However they have not yet confirmed whether their definition of a smaller organisation will be the same as that defined by the Companies Act 2006. This definition is an entity with less than 50 employees, a turnover less than £10.2m and assets of £5.2m or less.

 

What next?

The Government already provides an online tool – CEST – which allows organisations to check the employment status of contractors and this is due to be further improved to make the process easier to follow.

The Government has also confirmed that a new consultation will take place on how the new rules will be operated in practice and that there will be no retrospective element to the private sector off-payroll working extension. For contractors and the companies that use their expert services, this is at least something to be grateful for!

If you are a contractor and need some advice on the new rules, or if you use contractors and want to consider the implications, please contact us for expert advice.

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According to HMRC, if existing tax rules for private sector contractors were left untouched, it would cost the Treasury £1.3bn a year by 2023-24 in lost revenues. This is because these workers do not incur employers’ NICs and other employment related taxes as they typically work through limited companies and take their remuneration in the form of dividends.

It’s a lot of money for the Government to be losing so as expected, the off-payroll compliance rules imposed upon public sector organisations from April 2017 were extended to the private sector in last month’s Budget, as a replacement to the IR35 rules which have proved largely ineffective. This change came despite widespread concerns raised during a three-month consultation process over the financial implications for contractors and organisations alike.

The new off-payroll rules will take effect from 6 April 2020 and the Government says that the time available until then should allow businesses to review their existing contracts and make any changes needed to systems and processes.

 

The future of contracting in the private sector

What these changes essentially mean is that the compliance responsibility for contractors who are working for private organisations through limited companies will now reside with the organisation, agency or other third party engaging the worker, rather than with the individual worker. Although on the surface this may not appear a big deal, some experts are saying they represent “the most significant change to the operation of employment taxes for many years” and will have a big impact on organisations and their contractors.

In practical terms, it means that some contractors are likely to find themselves treated as employees and taxed at source, because the organisations engaging them do not want any repercussions from HMRC. Given that most contractors tend to be higher or even additional rate tax payers, this potentially has big financial implications for both the worker and for the employing organisation. Even though the dividend tax breaks for close company directors have slowly been eroded, it still tends to be more tax efficient for a contractor or consultant to operate through a limited company than either dis-incorporate or join the payroll as an employee.

Added to this, many organisations prefer to engage contractors for short term projects to get access to their specialist skills because it can be far more cost effective than increasing their employee headcount. These new rules create an additional compliance burden and as a result, HMRC are providing support and guidance.

 

Extra tax to pay

Organisations will need to review their processes and potentially add to existing payroll management operations. There will also be cost implications for businesses who use contractors that fall within the new off-payroll rules, because they will be liable for employers’ NICs and potentially also the Apprenticeship Levy. This amounts to an extra 14.3%, which will be chargeable on contractor fees. In addition, businesses will need to make the necessary changes to their systems and processes, which will have an associated cost.

 

Are there any exemptions?

HMRC has already confirmed that ‘smaller organisations’ will be exempt and can continue operating as they have been. However they have not yet confirmed whether their definition of a smaller organisation will be the same as that defined by the Companies Act 2006. This definition is an entity with less than 50 employees, a turnover less than £10.2m and assets of £5.2m or less.

 

What next?

The Government already provides an online tool – CEST – which allows organisations to check the employment status of contractors and this is due to be further improved to make the process easier to follow.

The Government has also confirmed that a new consultation will take place on how the new rules will be operated in practice and that there will be no retrospective element to the private sector off-payroll working extension. For contractors and the companies that use their expert services, this is at least something to be grateful for!

If you are a contractor and need some advice on the new rules, or if you use contractors and want to consider the implications, please contact us for expert advice.