Budget 2018: Off-payroll working rules extended to the private sector

published on November 8, 2018 // reading time approx. 2 minutes

Further to our previous article on IR35 – The "Disguised Employment" Tax Legislation in March 2017, the UK government has announced during its October 2018 budget that the changes to the IR35 off-payroll working rules will now be extended to the private sector.

To recap, the off-payroll working rules were introduced in 2000 and require individuals who work like employees but through personal service companies, pay similar taxes to "normal" employees on a payroll. It works by requiring the personal service company to operate PAYE on the income it receives.

In April 2017 a reform was introduced to deter public sector employers and workers from using off-payroll working to reduce their tax liabilities as the government considered that the rules were not operating effectively. As a result, the responsibility for operating PAYE and National Insurance contributions shifted from the personal service company to the engaging party, or the "client".  HMRC estimates that this public-sector reform has raised around £550 million in income tax and National Insurance contributions in the first year alone and unsurprisingly, the government is now keen to introduce similar reforms for the private sector.

How this will work in practice

From 6 April 2020, medium and large businesses will need to decide whether these rules apply to any engagements they have with personal service companies for the service of individuals. If it is determined that the rules do apply, the business paying the personal service company will need to deduct income tax and employees' National Insurance contributions and pay employers' National Insurance contributions.

This will introduce a significant administrative burden on businesses who engage personal service companies. It is likely that many will opt, particularly in the case of any uncertainty as to the status of the individuals, to simply put them on the payroll rather than face potential significant financial consequences for incorrectly identifying them.

Another effect is that the additional tax and administrative burdens on those trading through personal service companies may lead to such individuals increasing their costs towards the engaging party.

The government has confirmed that the reform is not retrospective; instead, HMRC will focus its efforts on ensuring businesses comply with the reform going forward.

The 1.5 million smallest businesses in the UK will not be affected by this change as yet. In the meantime, the government will continue to consult on the operation of the reform which shall be published in the next few months. This consultation will be relied upon with regards to the draft Finance Bill legislation which is due to be published in Summer 2019.