Publish Date

Jan 11, 2019

Off-Payroll Working: Reform of IR35 for the Private Sector

A&M Tax Advisor Update

When the Chancellor of the Exchequer delivered the Government’s annual Budget statement on 29 October 2018, one of the most significant announcements for larger businesses concerned the future operation of the off-payroll working rules (IR35) for medium and large companies in the private sector. Smaller companies will continue to apply the existing rules. HMRC announced in December 2018 that the definition of a ‘small’ company will follow the provisions set out in Companies Act 2006 whereby a company qualifies as ‘small’ if two or more of the following requirements are met:

  • Turnover – not more than £10.2m
  • Balance sheet total – not more than £5.1m
  • Number of employees – not more than 50

Any company that does not fall within this definition of ‘small’ will be within scope of the new rules.
IR35 is relevant where services are provided to a company (the engager) by a worker’s own limited company or partnership (the contractor). Since 2000, in the private sector it has been the responsibility of the contractor to determine whether the worker would have been an employee of the engager were they to have provided their services directly and if so to subject the remuneration to PAYE and National Insurance Contributions (NIC).

The changes will see the payroll tax obligations shift from the contractor (the personal service company) to the engager, in the same way that has applied to the public sector since April 2017. This will signal a dramatic change to the way in which businesses arrange their resourcing requirements. Almost inevitably this will result in an increase in costs and a reduction in flexibility at a time of immense uncertainty for UK businesses.

Whilst the proposed changes will take place from 6 April 2020 (the government having opted to give businesses some additional time to prepare), their complexity should not be underestimated. Significant lead-time will be needed to prepare for the changes.
In this edition of Tax Adviser Update, Louise Jenkins takes a look at what the proposals will mean in practice for those businesses that engage workers via personal service companies.