By David Wignall
MHA MacIntyre Hudson
ONE of the more widely-predicted changes to be introduced in the October 2018 budget was that applying to the Intermediaries legislation - usually referred to as IR35 - which will come into force from April 2020 for medium and large-sized (definitions as yet unspecified) businesses in the private sector.
Since April 2017 engagers in the public sector, such as NHS Trusts and the BBC, have been required to examine the arrangements they have with workers who supply their services through personal service companies (PSCs). Where, but for the existence of the PSC, the arrangement would be one of employment, the public sector engager is required to operate PAYE on all amounts payable to the PSC.
Outside the public sector it is the PSC itself that currently has to make that decision and to operate PAYE on all amounts received if employment status is relevant. The advantages of such an arrangement falling outside IR35 are significant - dividends can have a lower tax rate than salary and do not attract a liability to National Insurance. The potential loss to the Exchequer was of some concern to the Treasury. HMRC estimated that as many as 90 per cent of PSCs were failing to operate the rules correctly at a cost to the public purse of £400m. Although the statistical basis for this estimate may be questionable it does give an insight into why the authorities felt the need for change.
Public sector bodies were given little advance notice or guidance as to how the then new rules were to operate. To assist, HMRC provided an online Check Employment Status Tool (CEST). Although the use of the tool is not compulsory, it is designed to assist with the contract review process. Unfortunately, the tool only went live (in beta testing mode) to the public on 1 March 2017. This gave most public sector bodies only a month to conduct their reviews before they were supposed to operate PAYE on the relevant engagements.
CEST itself caused problems. Converting something that is as subjective as employment status into algorithms, perhaps unsurprisingly, proved more difficult than expected. The recent National Audit Office report on the BBC's engagement with PSCs stated that the Corporation had been unable to obtain a result in 50 per cent of the cases they reviewed using CEST.
The private sector will, of course, benefit from the lessons learned from the April 2017 changes. In particular, the sector will have had nearly 18 months to prepare for the introduction of the 'new' rules. A lot of work has been done on CEST, though doubts as to its reliability remain - the concept of mutuality of obligation, a key test in deciding employment status, has been omitted from the tool, though it is hoped that this will be factored in to future updates.
Experience suggests that private sector businesses are likely to require all of the extra time afforded to them to prepare for the change. Failure to prepare for the new rules could result in engagers facing significant liabilities to tax, National Insurance, interest and penalties. It is strongly recommended that any business paying workers through PSCs should embark on a programme to identify those contracts that are at risk and to ensure that steps are in place to ensure that PAYE is operated where appropriate from 6 April 2020.