Keep Calm and Carry On Contracting? But, are you a Personal Service Company?
“IR 35” was the 1999 Inland Revenue pamphlet that explained to companies they could be liable for paying a kind of payroll tax. This was for any “one-man” or “one-woman” Director business providing personal services to a main business contractor, through their own Personal Service Company (PSC).
After 18 years, most people still know it and refer to it as “IR35”. It’s a bit like the good old “Radio Times” except the latter is much more entertaining.
IR 35 still does apply, but HMRC haven’t had anything near the success with it that was hoped for. This is mainly due to muddled thinking and an ignorance of complex and unpredictable leading tax cases on employment status.
A Change is Coming
In April 2017, HMRC introduced changes to “off payroll working” in the public sector, which removed the decision process from the individual operating through their PSC and stipulated that the public sector body must decide about the engagement.
Those bodies affected included the NHS, BBC and MOD to name but a few. The decision all public sector bodies had to make when they engaged a PSC was whether there was a quasi-master/servant relationship.
In other words, if you took out the PSC, was it the same as paying an employee for doing the job? That’s an oversimplification but you get the point. If there was this situation, or in many cases the merest whiff of it, the public body will operate a kind of payroll tax when it pays the PSC.
A New Approach Has the Potential For New Headaches
We were also handed a new concept of the ‘fee-payer’, which is the body which pays the PSC. Where the engagement was with the public sector body direct, that body would be liable for any incorrect status decisions. But, if there were agencies in the chain, that agency immediately above the PSC in the chain becomes responsible.
The fact that agencies did not want to get caught out, and public bodies likewise, has been the major reason why from April 2017 to February 2018, around £500 million in revenue collections has been estimated as thanks to “off-payroll working” rules.
PSCs in the public sector also suffered the removal of the flat rate 5% deduction from the PSCs income for general expenses incurred in the running of the PSCs business. If you were a PSC supplying only public sector customers, then all of your income would be accounted for as either tax/NICs or net pay. Your overheads suddenly became a tax loss without a home.
Because of this (in the main) , many PSC’s closed down and their owners became umbrella employees or left to service the private sector.
New PSC Rules Are Coming, It’s Time to Plan
Perhaps due in no small part to the impending impact of
Brexit, the Government has decided that the rules
will come into that same private sector,. This will not be
until April 2020 and then only for so called “large and medium” Contractors. Smaller Contractors that engage PSC’s will not be affected by the 2020 change.
The 2018 Autumn Budget Brief also clarified that the reform will not be retrospective and “HMRC will focus its efforts on ensuring businesses comply with the reform rather than focus on historic cases”. It says further that HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. This will follow the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years. This has to be a good thing. It will incentivise businesses to comply. HMRC should not be penalising soft targets that comply voluntarily.
There is to be “further consultation on the detailed operation of the reform” to be published in the coming months, which will “inform the Draft Finance Bill legislation expected to be published in Summer 2019”.
This is good news for small businesses that are Contractors of PSC’s. The estimate is that they number about 1.5 million.
But, here’s
the important thing – if you own a PSC and you service medium or large Contractors (i.e. not end users) , the writing seems to be on the wall, for a bit of a showdown some time in 2020. From that date, those Contractors may be obliged to tax your PSC income under a type of PAYE approach.
Regardless of industry type, who are your company Contractors and how big are they? Could you shift your client base over the next year or two? This may be the price to pay for some PSC’s that want to endure. We can help you navigate this change, just call the team on
023 8061 4404 or
send us an email.
