The 2016 Budget placed the thin end of a potentially large wedge into the relationship between contractors working through personal services companies (PSCs) and some end users of their services, namely public sector bodies (PSBs) by requiring PSBs to make paying tax at source decisions (PTSDs) when paying PSCs.
The proposals are that PSBs that engage workers via PSCs will be responsible for assessing whether the terms of the engagement fall within the IR35 rules or not. If the PSB engages the PSC via one or more intermediaries, then the intermediary closest in the chain to the PSC will be responsible. If an engagement falls within IR35, the PSB or intermediary will look through the corporate structure and operate PAYE & NIC on the basis of the deemed payment rules within IR35. Thus the PSC will raise an invoice for, say, £2,000 plus VAT and the PSB will treat the £2,000 as a gross payment and deduct tax and NI accordingly, coming to a deduction of perhaps £300. The PSB will then pay the PSC £2,100, being £2,000 plus £400 VAT, less £300 tax & NIC. The PSC will be credited with the tax and NIC against any deductions it makes in paying its owner.
The only respite is that the proposals are not due to be implemented until April 2017 and in the interim there is to be a consultation. There are still some details to be settled and it is not clear, for instance, whether the PSC will have to pay its owner by way of salary, or at least go through a deemed salary calculation, to benefit from the offset of tax deducted at source.
The approach in making the intermediary or end-user responsible mirrors the recent developments in the payment of travel and subsistence expenses, which are due to be implemented from next month, which put the onus on the intermediary or the end-user to ensure that the right amount of tax is paid.
Further to the above, HMRC’s technical note states that IR35 rules are complex and that non-compliance is widespread. There will be assistance to enable PSBs and intermediaries in making PTSDs and there is talk of the development of an on-line tool. Further, there is mention of simplification of the IR35 rules, which, it seems to me, will be necessary if the on-line tool is to be effective and straightforward to use. Could we be applying the supervision, direction and control test that is within travel and subsistence rules for contractors working in the public sector next year?
Applying some perspective to the proposals, it’s been clear for many years that IR35 hasn’t worked as intended, so reform is necessary. There is some logic to using PSBs as the guinea pigs for reforms, as certain numbers of them already have a requirement to make decisions about engagements and all are susceptible to the enforcement of compliance. There is the short term confusion to contend with of two different systems being in operation, especially for those contractors who flit in and out of the public sector. However, if all of the problems in a new fit for purpose IR35 can be ironed out in a thorough PSB based trial, then we may all be grateful in the long run.