Contractor Accounting | Online Accounting

In an extension to the rules introduced in April 2017 for the public sector, HMRC are now looking to tackle non-compliance with IR35 in the private sector. This consultation outlines some of the main options being considered for tackling non-compliance in the private sector along with a review of the effectiveness of public sector roll out.

Why?

With the number of small companies (1-2 directors) rising from 250,000 in 2000 to over 1 million in 2015, under the current rules HMRC believe a third of people operating as a PSC should be operating as inside IR35, with only 10% of this group correctly applying the legislation

The cost of non-compliance in the private sector has been projected by HMRC to be £700 million in 2017/18, rising to £1.2 billion by 2022/23. Along with the cost, HMRC are looking to reduce the challenges they face when carrying our IR35 enquiries.

Public Sector Success?

By HMRC’s assessment, the public sector reform has been successful both in increasing tax compliance and resolving compliance challenges faced in enforcing the off-payroll working rules in the public sector. As an indication of this:

HMRC estimate that an additional £410 million of income tax and NICs have been raised since the public-sector reforms, not including the reduced corporation tax and dividend receipts
There are an estimated 58,000 extra individuals paying income tax & NICs in any given month since the public-sector reforms

However, independent research commissioned by HMRC to address the many concerns raised does highlight the challenges public sector bodies faced, with the introduction of the reform increasing initial admin burdens, costs and struggles of being unfamiliar with the legislation. HMRC do acknowledge that ‘public authorities would have preferred more time to prepare and adapt’ to the public-sector reforms and ask for feedback on how these areas could be improved in a roll out to the private sector.

Options?

The consultation provides three potential options as well as asking for other suggestions:

Extend the public sector reform to the private sector - This would see the end client being responsible for determining the contractor IR35 status and the last agency in the supply chain (if there is an agency, otherwise the end client) be required to deduct PAYE and report this to HMRC.
Securing the labour chain - This option requires the end client to carry out huge amounts of due diligence on all businesses in the supply chain and insert clauses into contracts to ensure the contractor's employment status has been correctly determined.
Additional recordkeeping - This option requires the end client to retain certain information that would make it easier and quicker for HMRC to gather the required information if they ever decided to carry out an enquiry.

Other options such as a flat-rate withholding tax or a minimum length of engagement have been ruled as ‘out of the scope’ and therefore aren’t being considered in this consultation. This consultation focuses only on the enforcement of the current IR35 rules whereas these other options would fundamentally change the rules behind IR35 according to HMRC.

When?

A proposed date hasn’t been given for the private sector reform but with the consultation running up to 10th August 2018 and with HMRC taking several months to respond, along with the Autumn Budget being in late November, it’s not certain whether the changes will be rolled out for April 2019 or for a later date.