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UK – Treasury finalising plans to extend Off-Payroll rules to private sector

12 October 2018

Her Majesty’s Treasury is finalising plans to extend ‘Off-Payroll’ rules to the private sector as part of a crackdown on tax avoidance from private companies claiming self-employed status.

The BBC reports that the Treasury’s plans could be announced as early as this month’s budget.

The Treasury said it believes a third of people claiming self-employed status as a "personal service company" are in fact full employees and should pay more tax. Full employees pay higher levels of national insurance compared with the self-employed.

According to the Treasury, without reform, high levels of non-compliance with tax rules could cost HM Revenue and Customs £1.2 billion a year by 2023.

In April last year, following changes to the IR35 legislation, hirers in the public sector became responsible for determining the status of an assignment to supply services through a Personal Services Company (PSC).

The Treasury is now looking to demand that firms which use personal service company contractors take legal responsibility for ensuring "off-payroll" contractors stick to the IR35 rules.

HMRC estimated that its overhaul in the public sector on “synthetic” self-employed (those using self-employed status to reduce taxes) has raised £410 million extra in taxes since 2016.

The proposed changes have been met with criticism by the staffing and contractor industry.

Tania Bowers, General Counsel at the Association of Professional Staffing Companies commented, “We are extremely disappointed that Her Majesty’s Treasury (HMT) appear determined to discount the advice of APSCo, and every other influential body, and charge ahead with these changes providing no time for business to adapt.”

Bowers added that APSCo maintains that HMT’s proposals “will have an adverse impact on the strength of the UK’s labour market and wider economy at a critical time.”

“While there is yet no indication that any changes will take effect in April 2019, the fact that the announcement is set to be included in the upcoming Budget, along with the Government’s track record on such matters, means that this could well be HMT’s intention,” Bowers said.

Bowers also commented on the Check Employment Status for Tax tool (CEST).

“There is almost universal agreement that the CEST tool, in its current format, is inaccurate and not fit for purpose,” Bowers said. “Businesses will need to upskill their workforces to be able to make appropriate status determinations and they will need time to get their internal processes and IT systems in order, to cope with the new rules.”

APSCo urged the Treasury to delay the roll-out of its off-payroll private sector extension.

Julia Kermode, Chief Executive of Freelancer and Contractor Service Associate, commented on the BBC’s prediction that the Treasury’s plans could be announced in this year’s budget, “HMRC cannot have properly considered the huge number of consultation responses it received to make any informed decisions about Off-Payroll in the run up to this month’s budget so it is a bold prediction by the BBC.”

Kermode also commented on the £1.2 billion a year non-compliance cost figure, ““What’s more the often-quoted £1.2 billion figure is based on incorrect assumptions detailed in the Office of Budget Responsibility’s Fiscal Risks Report from July 2017.  According to the OBR, their assumption is based on 15.7% of the UK workforce being self-employed by 2021 but the current rate is 14.8% and the rate of self-employment is not increasing as quickly as it has done in recent years, so is unlikely to reach their forecast.”

“The OBR figure also assumes that the rate of incorporations will continue rising by 4% annually, however it is just 3.5%,” Kermode said. “Whilst these deviations from OBR figures might seem small, they will in fact have a sizeable impact on the fiscal projections, as OBR themselves admit in their report.  The impact of both of these inaccurate forecasts means that HMRC's projected £1.2bn loss is wholly inaccurate,” Kermode said.

The government’s ability to get its upcoming budget approved by parliament is under question given the announcement by the Democratic Unionist Party that they will vote down the budget unless their concerns over Brexit negotiations are met.

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