The rules, referred to as IR35, require that employment taxes be paid by people who provide services to companies through a personal service company (PSC) if that person would have been regarded as an employee of the business if they had not contracted through the PSC. However, the PSC is liable to decide whether IR35 applies and to pay the employment taxes, including income tax and national insurance contributions.
Under the new rules the business engager will be liable to decide whether the IR35 rules apply; will operate PAYE, and will pay employers' national insurance contributions at 13.8%, from April 2020.
It had been rumoured that the changes would apply from April 2019 but the fact that they will not apply until 2020 has been welcomed by tax expert Ian Hyde of Pinsent Masons, the law firm behind Out-law.com. "The announcement of the application of the public sector rules to the private sector is not surprising," he said. "This is an anti-avoidance measure and very different from the chancellor’s previous attempt to align national insurance on employed and self employed."
Similar reforms to IR35 were introduced in the public sector in April 2017. The changes meant that public authorities became responsible for determining the employment status of those they engaged through PSCs or other intermediaries, deducting any income tax and paying employers' NICs. The decision to extend the public sector reforms to the private sector was first announced in a consultation paper published earlier this year. A response to that consultation has also been published today
The changes will have a significant impact on businesses engaging large numbers of contractors through PSCs. Hyde said that assessing the impact of these changes and managing the increased risks and costs of engaging with PSCs will be a major compliance exercise.
"Despite the delay in implementation, corporates are faced yet again with policing tax compliance for HMRC and will need to review their strategies on how they engage off payroll workers so that they have workable structures well before April 2020," he said.
"However, the implications of this anticipated announcement will extend beyond whether contractors pass or fail the IR35 test. Corporates will need to make strategic decisions about the future structure of their off payroll workforce, including taking into account the outcomes of the Taylor review," Hyde said.
The new private sector rules will only apply to medium and large businesses, the chancellor has confirmed.
The reforms will not be retrospective and the government has said that HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. Businesses' decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years, it said in a policy paper published this afternoon.
A further consultation paper on the detailed operation of the reforms is to be published in the coming months with draft legislation expected to be published in summer 2019.