March 17, 2020 Update: Government have announced a delay in IR35 Off – Payroll reform to April 2021.
On 30 November 2019, as part of
the general election campaign, Sajid Javid announced that a review of IR35
would be undertaken should the Conservatives form the next government. True to
his word, a review was announced
on 7 January 2020.
However, the scope of the review
seems to be somewhat more limited than many had hoped, with the stated aims
- A review into implementation of changes to the off-payroll working rules, and
- gathering evidence from affected individuals and businesses to ensure smooth implementation of the reforms.
Not the root and branch review of
IR35 and status that had been hoped for by those most optimistic or most desperate.
The direction of travel appears to be no change of principle, but maybe a
softly, softly approach to implementation.
There may also be the underlying
urge to whip some of the larger end-users of contractors back into line. This
follows the announcements from various high profile companies that they would
be forsaking use of contractors from April 2020, with a minority of contractors
becoming permanent employees and the majority being herded into umbrella
companies. Very few larger companies seem to be willing to take the time and
the risk of contractor by contractor assessments. Contractor groups are
frustrated by this and may use the review to try to get government onside to
persuade large companies to re-think their approach.
This insulation from risk by the
end-users is at the very heart of the IR35 and status debate, as use of
personal service companies (PSCs) arose to allow large businesses to reduce
headcount and provide a flexible workforce, whilst avoiding any risk of workers
being deemed employees and triggering a PAYE & NIC cost.
Of course the contractors
themselves have benefitted, as corporation tax rates have fallen well below
income tax rates and dividends continue to attract far less taxation than
The longer term view on this can
be gained from a recent parliamentary publication. On 16 December last year a
research briefing was made available in the House of Commons Library entitled,
service companies & IR35’. This provides a comprehensive primer
in the development of the legislation and how we’ve got to where we are now.
For those who cannot afford the
time or effort to go through all 146 pages, there’s a useful executive summary
that gives an overview, detailing a few highlights, although these are skewed
towards more recent developments. There are some very telling details within
the commentary, however. One of these is chart 5.12 on page 10. This shows a
comparison of tax due on income of £50,000 for 2017-18 between that earned from
employment, self-employment and via a PSC. The tax take on employed income is
32.3%, on self-employed income 24.5% and via a PSC 19.7%. This gives at least a
partial real world view, assuming that the employee’s income is reduced to
accommodate the employer’s national insurance payable. However, no account is
taken of the deductibility of expenses in arriving at taxable income that
applies to both the self-employed and the PSC over the employee. This, if
anything, will skew the tax benefits further away from the employee.
Of course, this is only one
measure of how employment, self-employment and personal service companies can
be measured against one another, with the employment rights of paid holiday,
sick pay and pension contributions needing to be brought into play.
We must wait until mid-February for the latest chapter in the 20 year saga of IR35 and, here at UHY, we will be analysing the changes and advising clients and others how they may be impacted and what they should do next. If you have any concerns about off-payroll working in the private sector, IR35 and employment status for tax more generally, please contact John Sheehan on 01462 687333 or email email@example.com.