Budget 2018: Extension announced to off-payroll tax rules (IR35)
The Chancellor has used the 2018 Autumn Budget to announce the extension of measures to increase compliance with the off-payroll rules, commonly known as IR35, to private sector engagers.
The measures are intended to further reduce tax avoidance by individuals who (HMRC believes) are wrongly benefitting from the tax advantages afforded to those who deliver their services through an intermediary or Personal Service Company.
At present (except in the case of a public sector engager), the individual contractor is responsible for assessing his or her IR35 status. Under the planned changes it will become the responsibility of the engaging business to determine whether to deduct tax and National Insurance from the contractor’s earnings. The responsibility for making deductions, if required, will rest with whichever party pays the contractor. In some cases, this could be the recruitment agency. This means that recruitment agencies may be required to make tax deductions and cover tax liabilities to HMRC.
The public sector has been subject to similar anti-avoidance rules since 2017 and there has been widespread criticism that it is premature to extend the scope of these without time for a full review of the impacts.
The planned extension will not take effect until Spring 2020 and we will wait for the outcome of a detailed consultation next year as well as the sight of the legislation. It is worth noting that the changes will only, as currently proposed, affect medium and large businesses, but we also await guidance on what the thresholds will be.
In the interim, it is important for recruitment businesses to consider how they will approach the way they pay contractors and freelance workers, as well as taking the opportunity to build sustainable relationships with clients.
In addition, where a business is armed with key knowledge about what arrangements and contract terms may or may not fail the IR35 tests, it will help them during the negotiation and arrangement of placements for contractors, including any subsequent disputes with HMRC. By addressing the situation now, problems in the future may be avoided.
This bulletin contains general overview information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.