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UK – Government opens consultation on private-sector IR35 independent contractor tax rules

05 March 2019

The UK government is moving ahead with plans to expand IR35 off-payroll rules covering taxation and independent contractors to the private sector. Tuesday, HMRC opened a consultation to gather comments from stakeholders on the proposals for regulation of the private sector use of personal service contractors.

Extension of the off-payroll sector rules to cover independent contractor usage in the private sector is due to commence 6 April 2020. The consultation contains 18 questions in total, and the document also aims to provide stakeholders with more certainty around how the rules will operate.

Off-payroll working rules were introduced in the public sector in April 2017. And the consultation released this week says the public-sector rules will serve as the starting point when formulating the private-sector rules.

The existing rules make public authorities responsible for assessing the tax status of independent contractors when providing work through a personal service company or other intermediary.

The public-sector rules also make the person that pays personal service companies responsible for deducting, accounting for and paying income and other employment taxes to the HMRC.

Law firm Osborne Clarke LLP noted two key developments in the consultation released Tuesday,

  1. Parties that did not comply with their obligations could be liable.
  2. “HMRC will, where an intermediary becomes insolvent, have the right to transfer tax debt up the supply chain “until they find someone who can pay.”

This means they, and MSPs, “will take a lot more interest in the compliance of their supply chain and we may see substantial consolidation of supply chains,” according to the firm.

Fiona Coombe, director of legal and regulatory research at Staffing Industry Analysts, noted there are proposals to amend the legislation in relation to private-sector firms.

“It seems they are willing to make amendments for the private sector, such as requiring the client to provide their status determination to both the off-payroll worker and the agency,” Coombe said. Still, it’s important for private-sector business to respond the consultation to ensure any changes do not create further administrative burdens.

Tom Hadley, director of policy at the Recruitment and Employment Confederation, tweeted the rules will not be easy to implement by April 2020, “but REC will be working closely with members & government to ensure new requirements are workable and that compliant businesses are not penalised.”

However, consultation was blasted by IPSE, the Association of Independent Professionals and the Self-Employed. It said the rules will harm freelancers and the businesses that use them.

“This is an astonishingly myopic move. The UK’s greatest competitive advantage is its flexible labour market,” IPSE Deputy Director of Policy Andy Chamberlain said in a statement. “This proposal will dramatically restrict that flexibility and starve UK businesses of the freelance talent they need to get work done. Pushing ahead with this during Brexit will hamstring freelancers and their clients when the country needs them most.”

IPSE said the public-sector enforcement has led to mass contractor walkouts that led to disruption, staff shortages and the cancellation of major projects.

The UK government first introduced the IR35 legislation in April 2000 to counter tax avoidance through the misclassification of employees as independent contractors, according to a report by Staffing Industry Analysts. The legislation aimed to ensure independent contractors – who would be regarded as employees for tax purposes but for their limited companies – should pay tax and social security on income from their companies as if they were employees.

Cost of noncompliance with the off-payroll working rules in the private sector is growing and are on track to reaching £1.3 billion a year by 2023/2024, according to the consultation document.

The consultation, where the government is accepting comments, ends on 28 May 2019. The comments will inform the draft Finance Bill legislation expected to be published in the summer of this year.

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