24 Nov 2017

The Budget - Personal service companies, tax and employment status

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In Wednesday's Budget, the Chancellor confirmed that the Government intends to consult on extending to the private sector the amendments to IR35 which were introduced to the public sector in April this year. Although the consultation has not yet been launched, it now seems inevitable that changes will come into force for the private sector, possibly as early as 2019, so businesses need to be prepared.

 

What might change?

  • At present, if an individual provides services to a business through a personal service company ("PSC"), the individual is responsible for applying the IR35 rules and determining whether the nature of the relationship with the end user business would be one of employment in the absence of the PSC. If he determines that it would be, the PSC is required to account for income tax and national insurance contributions ("NICs") on the income received.
  • If reforms mirror those implemented in the public sector, the onus will instead fall on the end user business to determine deemed employment status and then to account for income tax and NICs in respect of any payments made to the PSC.

 

What would this mean for businesses?

The potential changes would have a number of implications:

  • There would be a significant additional administrative burden on businesses who engage contractors via PSCs. They will need to obtain additional information about the relationship between the contractor and the PSC in order to establish employment status. There is an online tool provided by HMRC to assist with this, but going through the questions on that tool in relation to every contractor is potentially very onerous.

  • Any new regime is likely to increase costs for businesses which use contractors via PSCs as they may become liable for employers' NICs in relation to those contractors. This cost could be passed onto the PSC as part of the fee negotiations in relation to new contracts and existing contracts may need to be renegotiated to reflect this additional cost.

  • Any changes may lead to a move away from the PSC model as it is viewed as a less effective tax efficient structure. Instead, contractors may seek to contract directly with end users, which increases the risk of subsequent employment status disputes with those contractors.
     

 

Would this mean contractors would become employees of the end user?

  • No. Importantly, classification of a contractor as a deemed employee for these purposes does not mean that they are automatically deemed to be an employee of the end user. In principle, the PSC will remain liable in relation to any employment rights asserted as well as for the payment of benefits such as Statutory Sick Pay, Statutory Maternity Pay and for pensions auto-enrolment duties. The end user will be liable only for the income tax and NICs liabilities.

  • However, it will remain open to individuals to claim that the PSC structure is simply a sham and that they are, in fact, employees or workers of the end user. Given the outcome of recent employment status cases such as those involving Uber and Pimlico Plumbers, it is possible that the new regime will increase the risk of employment tribunals agreeing with such arguments.

  • In the Budget, the Government also undertook to publish a discussion paper as part of its response to Matthew Taylor’s review of employment practices in the modern economy. Any reforms in this area are likely also to impact on the IR35 position.

 

What should you be doing now?

Preparation will be key to managing these changes. Businesses that use contractors should start carrying out initial assessments to establish whether they could be caught by the new rules and the extent to which this could impact on their bottom line (e.g. how much could it cost in employer's NICs?). If there is likely to be an impact, businesses should consider whether alternative business models – such as use of agency workers or outsourcing - might better serve their needs.

We will, of course, report on the consultation when it is published.

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Barbara Allen

Barbara Allen
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Purvis Ghani

Purvis Ghani
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