HMRC has released its long-awaited consultation on Off-Payroll working in the private sector (IR35) , a move that could affect over 2 million contractors. While this has already been implemented in the public sector, it now seems that HMRC want to move it into the private sector to account for a claimed tax loss of £1.2 billion. So, if you have your own Personal Service Company and are providing services to the Private Sector you need to consider what these changes will mean for you and make sure you have your say if you disagree with them.
What’s the big deal?
The biggest change this will bring to those working in the private sector is who assesses your contract. Previously, it was the contractor who was providing the service. Let’s call this guy Henry. Henry used to be able to judge his own business and services when deciding his tax status. If he got it wrong and he was caught, he would be liable to pay any fees or penalties. Make sense, right?
What HMRC are now proposing is that this determination will be made by Henry’s client, who has no real insight into his business. Furthermore, it is now the client who will be liable to pay any tax and penalties if they get it wrong. While this may seem like a small change, it effectively means that clients will often opt to play it safe to avoid falling foul of HMRC’s assessment and place the contract within IR35. Ultimately, if Henry doesn’t agree with the determination, he can liaise with his client until he’s blue in the face, but at the end of the day, they make the call. Not only can Henry end up with a wrong determination on his employment status, but it can also lead to hefty NI and tax deductions before he even sees a penny of his hard-earned cash.
Wait, there’s more…
That decision alone is enough to raise a few eyebrows, but to make matters worse, HMRC have provided a system called CEST (Checking Employment Status for Tax) to assist in this matter. The catch, however, is that this system has been deemed by various professionals as not fit for purpose, as it draws inaccurate conclusions and doesn’t take into account the many complicated elements involved in deciding the tax status of a business. Incredibly, the widespread criticism actually prompted HMRC to issue a statement admitting that they have no verifiable proof that CEST is accurate. To make matters worse, investigations into the matter revealed that CEST was unable to make a correct determination in 37% of cases.
The proposed changes to Off-Payroll working will essentially disenfranchise those who understand their business best and puts the power in the hands of their clients, who are being misled by CEST’s horribly unreliable results. If you’re an independent consultant, you run the very real risk of no longer having control over your business status. As such, we urge everyone involved to use this consultation, which ends on the 8th of August, as an opportunity to give their input on the subject. If passed it could change the face of contracting for years to come and could have serious economic ramifications.