Up to 170,000 Personal Service Companies (PSCs) are likely to be affected by the Off-payroll working rules which come in from next April according to HMRC. These changes could result in a windfall of IR35 tax Discovery cases for HMRC and a resultant tax-hell for PSCs and their owners.
From 6 April 2020, under the new rules for Off-payroll Working in the private sector, many individuals who supply their services via their own Personal Service Companies (PSCs) to large and medium sized end clients will find that they are taxed as if they are employees and their PSC fees will be paid after deduction of PAYE and national insurance.
The aim of the Off-payroll working rules is to replace IR35 which, it is concluded does not work, by moving the requirement to assess the individual’s employment status from the PSC to their end client in the labour supply chain. Whilst the individual may challenge that finding, the new rules ensure that it’s argument will be with the end client and not with HMRC.
There is a potential 'sting'. If the same individual has been providing services under the same contract conditions in previous tax years, the results of their end client's employment status test may then be of great interest to HMRC, who may then looking backwards using the results to review the past affairs of the PSC.
The Discovery Assessment rules allow HMRC to go back and raise assessments for the previous tax years outside of the normal investigation period of two years.
- Discovery Time Limits are set at four years if there has been any loss of tax.
- The discovery period can extend to six years if HMRC suspects the carelessness of the taxpayer or their adviser.
HMRC has already 'jumped the gun' and this week has been revealed to have been already contacting existing PSC supplied workers to the largest private sector employers with so called 'nudge' letters. Things are not good for PSC owners: according to a report in the FT HMRC has just written to 1,500 GlaxoSmithKline contractors informing them that they should have been with the PSC IR35 rules.
HMRC said in its letter, ‘We’re writing to you because you told us you were self-employed when you worked for and received payments through, your own company...After looking at the information we have for the 2018 to 2019 tax year, our view is that the contract between your PSC and GlaxoSmithKline comes under the off-payroll working rules ‘IR35’. In order to check and confirm your employment status, you can use our online tool, or seek advice from a tax expert.’
The letter provides that the PSCs must either settle outstanding PAYE and NICs by 22 September or provide evidence to support that they are not within IR35 by 19 September 2019. Anyone who does not comply will be potentially subject to investigation and if there is a loss of tax to penalties.
How to avoid penalties and a discovery?
Time has run out for the GCK workers: HMRC is prompting them to make a disclosure and therefore any penalties charged will be prompted' and higher than if unprompted and notified to HMRC without its intervention.
Other PSC owners who have worked out that they will be within off-payroll working from next year and this would have applied to their current year contracts had can potentially make an unprompted IR35 disclosure to HMRC will may well avoid all penalties.
Is HMRC offering an IR35 disclosure facility?
No, not at present. Taxpayers will have to use the normal online disclosure route. Given the potential numbers involved it would seem to make a lot of sense to offer one.
It is at present difficult to see what penalties are to be applied in the GSK cases as it appears from the letter that HMRC is simply looking at the 2018/19 tax year and if so, the taxpayers are 'in time' to correct their affairs for the year.
In terms of penalties, HMRC would normally assess penalties under Schedule 24 FA 2007 for error. These penalties are tax-geared and reductions are given for an unprompted disclosure.
Links to Useful guides
Personal Service companies and tax
What's new and recent case law
How to appeal a decision of HMRC
What to do if HMRC raises a PAYE determination or assessment
How to appeal a tax penalty
Step by step how and what to appeal. What are your potential grounds for appeal?
Off-payroll working, IR35 and Agency rules
The 'Off-payroll' working rules have different variations which apply as follows, depending on the status of the end client:
| Rule | End client | Who assesses the worker's employment status | Who deducts PAYE/NICs | When from |
| Off-payrolling: public sector | Public sector | End client | Fee payer | 6 April 2017 |
| Off-payrolling: private sector | Large or medium sized private sector | End client | Fee payer | 6 April 2020 |
| IR35: private sector | Large or medium sized private sector | PSC | PSC | Until 5 April 2020 |
| IR35: small private sector | Small sized private sector | PSC | PSC | On-going |
| Agency rules: | N/a: applies when worker supplies services directly to a staff agency (not via a PSC) | Agency | Agency | On-going |