Consultation document heralds a reform to the taxation of contractors working through personal service companies
After a period in abeyance the Government has re-focussed its sights on the perceived tax advantages of ‘off-payroll’ working through personal service companies (PSCs). On 18 May a new consultation document on off-payroll workers in the private sector was published by HMRC which heralds the introduction of a new regime whereby, irrespective of the PSC, the client (or an intermediary such as a staffing agency) will be liable for PAYE taxes as if the individual was directly employed.
Currently off-payroll workers who provide their services to clients through a PSC save NICs and income tax through gross payment of the fee to the PSC and extraction of profits through dividends. The current legislation, known as ‘IR35’, tackles this by treating the PSC as the employer in circumstances where, had the contact had been directly between the client and the worker, it would have had the characteristics of an employment contract. PAYE taxes are then imposed on the PSC (and not the client) as if the contractor was an employee. The government believes, however, that the IR35 rules are not being property applied and they estimate the loss to the Exchequer at £700m per year and rising.
The proposed new rules, following similar introduced for the public sector last year, will shift the tax risk and reporting burden to any intermediary agent, or to the client itself. The tax risks of employing individuals through PSCs will therefore be considerably increased. The consultation document asks for comments on wide range of questions including compliance, the level of obligation to be placed on the client, and the level of record keeping to be required. However, whilst the document is a ‘consultation’, it is realistic to plan for implementation next year.
Clients engaging contractors via PSCs need to keep a close eye on developments. Those using a lot of contractors may need to plan for new checking, compliance and record-keeping obligations and possibly increases in PAYE costs. Those using PSCs may find clients less willing to accept their status and standard-form contractual documentation. In either case, existing contracts may need to be substantially amended to ensure there is no tax risk for either party.
A link to the consultation can be found here.
If you have any concerns about the status of your contractors, or the impact these new rules might have on your business, please contact: Elizabeth Middleton