Off-payroll working in the private sector
The LITRG appreciate that the Government have considerable concerns regarding the non-compliance of the rules commonly known as IR35 in the private sector. We share these concerns and want people to pay the right amount of tax; however, we think the Government should proceed cautiously with implementing the changes made in the public sector into the private sector and in any event, should defer making a decision for a year or two.
The government is considering whether to extend the public sector off-payroll reforms into the private sector. The public sector changes mean that if a person is working through their own limited company (ltd) in the public sector then they are no longer in charge of determining if the intermediaries legislation (commonly known as IR35) applies. The ‘IR35’ determination now falls to the public body and if it applies, Pay As You Earn (PAYE) tax and National Insurance contributions (NIC) are withheld at source on any payments to the ltd.
Many low income workers often find themselves offered work in the private sector on the basis that they will structure their work through a ltd. Because IR35 is not enforced consistently, this can help save both them and their engagers tax. However, often the fees that they then have to pay to an intermediary to help them set up and run the ltd company far outweigh any savings that the individual may make.
While extending the IR35 public sector reforms to the private sector could help remove the ltd ‘incentive’ in time, we are concerned about what impact the changes will have on workers already in ltds. For example, with the tax ‘advantage’ gone, it is likely that many workers will be pulled out of ltds and put into PAYE umbrella arrangements. However, there are many non-compliant models out there and depending on whether the ltd is closed down correctly, this could leave the worker with messy ltd compliance issues that they do not understand.
We also consider the proposal from the perspective of a small business in the private sector. If the public sector changes go ahead in the private sector, we think there are both principled and practical reasons for granting an exemption to small businesses, particularly as the Check Employment Status for Tax (CEST) tool is not necessarily the holy grail that HMRC think it is.
Our full response can be found here: Off-payroll working in the private sector – LITRG response
Meredith McCammond