HMRC has issued a consultation: ‘Off-payroll working in the private sector’, this considers whether private sector PSCs should, like their public sector counterparts, be mandated into PAYE.
- HMRC thinks that only 10% of Personal Service Companies are being taxed correctly: they are failing to self assess the employment status of their workers.
- A past review of several large public sector engagers, including the BBC revealed that their policy was designed to avoid employer obligations and they encouraged workers to use PSCs and umbrella company arrangements.
- As a result of PSCs not operating IR35, the government may lose up to £1.2 billion in tax by 2023.
- There is a short term fall in public sector employment and a rise in self employment and this also indicates lower tax receipts in the future.
In April 2017 new rules were introduced for Off-payroll workers in the public sector, moving the responsibility for operating PAYE and NIC to the public authority (or fee-payer). IR35 does not apply in those circumstances. HMRC considers this successful, despite evidence of errors in HMRC's Check Employment Status Tool.
The new consultation considers:
- Extending the off-payroll working rules to the private sector (HMRC’s preferred option):
- The end-user of the worker (i.e. the end client) would be responsible for the assessment of the worker.
- If the rules applied, the end-user would be responsible for the employer’s NIC and for deducting tax and NIC from the payments.
- If the end-user does not take reasonable care with the assessment, or does not carry out the assessment it may be liable for the tax and NIC.
- Make the end-user ensure that off-payroll workers are complying with off-payroll rules:
- This could include adding clauses in contracts to require evidence of PAYE returns being filed and PAYE payments being made.
- Requirement for workers to provide a completed CEST determination and for end-user to check the outcome against the working practices of the worker in question.
- Penalise or name the non-compliant end-users.
- Additional record keeping requirements:
- Require the end-user to maintain contracts, rotas, line management reporting requirements etc. that relate to the engagement.
- This information would enable HMRC to quickly obtain the information required directly from the end-user when enquiring into a Personal Service Company.
- Other options which have been discounted:
- Removing those with short contracts from the off-payroll working requirements.
- Create a new corporate structure offering simplified tax treatment, limited liability, restriction on dividend frequency and requirement for the worker to be paid a minimum salary.
- Have the end-user pay the employer’s NIC, but not require the Personal Service Company to pay PAYE or employee’s NIC.
- Withholding tax for off-payroll engagements. The tax withheld would then offset the final liability of the company if the off-payroll rules apply, or will be refunded.
The closing date for comment is 10 August 2018 and the full consultation can be read here.
Summary of consultation questions
The compliance challenge
Q1. What could be done to improve the compliance enquiry process to reduce non-compliance, whilst safeguarding the rights of customers?
Options for how to tackle non-compliance Extending the public sector rules to the private sector
Q2. Could the public sector regime better fit the needs of businesses? How?
Q3. What if any, changes could help make the administration as simple as possible?
Q4. If the private sector rules were changed, do you have any evidence that there are parts of the private sector where the administration of any regime may need to vary even though the basic principles including for determining status, remain the same?
Q5. Is there any evidence that parts of the private sector will not have, or be able to acquire the administrative capacity, knowledge and resources to enable them to implement any changes in relation to off-payroll workers?
Q6. How could these difficulties be mitigated?
Q7. What aspects of policy design might be adjusted if similar changes were brought in for the private sector? Should we bring in a specific penalty if agencies fail to comply?
Q8. What action should be taken in the case where the fee-payer hasn’t acted upon the client’s conclusion that the worker would have been regarded as an employee for income tax and NICs purposes if engaged directly? Should an obligation be placed upon the fee-payer to adopt the client’s conclusion and there be sanctions for failing to do so?
Q9. What action should be taken if the worker or PSC is knowingly receiving income that has not had the right amount of tax and NICs deducted?
Q10. What systems and process changes would businesses need to make?
Q11. Would there be any process and administrative cost implications for businesses? Can you provide evidence of the scale and nature of these?
Q12. Can you provide any evidence that these costs would vary depending on how much notice businesses were provided for the introduction of any reform?
Q13. Is there anything else HMRC could do to ease the implementation for businesses, and can you provide evidence of how this would ease implementation or administration for businesses?
Encouraging or requiring businesses to secure their labour supply chains
Q14. Overall, what are your views on this option? Would it be a proportionate response to the issue?
Q15. If the government were to pursue this option, what checks should the client be required to perform?
Q16. How should different views on employment status be dealt with? For example in the public sector, disputes should be resolved between the client and the worker, which ultimately allows either party to walk away if they do not agree.
Q17. How would HMRC best enforce compliance with securing labour supply chains, keeping in mind the need to mitigate or reduce dealing with each PSC individually?
Q18. Should the requirement be underpinned by some form of penalty?
Q19. Should the requirement be underpinned by denying the client a deduction for the cost of labour from an unchecked supply chain?
Q20. Should the requirement be underpinned by the risk that the client could be named as having used a non-compliant supply chain?
Q21. Would such penalties effectively change behaviour within labour supply chains, helping to ensure the correct income tax and NICs are paid?
Q22. What would the impact (including the effect on administrative burdens) of this option be on affected businesses, agencies, and individuals?
Q23. How effective would this option be in addressing non-compliance with the off-payroll working rules in the private sector?
Q24. Is there any way to improve this option which would make it more effective? Additional record keeping
Q25. Overall, what are your views on this option? Would it be a proportionate response to the issue?
Q26. If the government were to pursue this option, what information should be required to be gathered?
Q27. How could the government ensure that others in the labour supply chain pass accurate and timely information to the client?
Q28. What penalties should fall on the client or others in the labour supply chain if they fail to comply with the requirement?
Q29. What would the impact (including the effect on administrative burdens) of this option be on affected businesses, agencies, and workers?
Q30. How effective would this option be in addressing non-compliance with the off-payroll working rules in the private sector?
Q31. Is there any way to improve this option which would make it more effective?
Other options to consider
Q32. Are there other options, within the scope of this consultation as set out in Chapter 2, that would be effective ways of tackling non-compliance in the private sector that the government should consider (for example, possibly drawing on lessons from other countries)?
Q33. Would these, or any of the other options outlined above, be more effective than extending the public sector reform? If so, how would they be more effective and on what grounds would they be preferable to extending the public sector reform?
Q34. Are there any other issues which businesses or individuals who may be affected would like to raise?