Off payroll working tax changes 'should be delayed'

Out-Law News | 30 May 2019 | 12:00 am | 2 min. read

Changes due to apply in the UK from April 2020 which will make businesses liable for determining the tax status of contractors who work through personal service companies (PSCs) should be delayed, according to a tax expert.

Penny Simmons of Pinsent Masons, the law firm behind Out-law.com, said: "Given the prevailing uncertainties for business in the UK in light of Brexit and the fact that draft legislation has not yet been published, the April 2020 timescale is ambitious, and the government should consider a further delay to April 2021 at the earliest," Simmons said. She was commenting as Pinsent Masons submitted its response to the consultation by UK tax authority HM Revenue & Customs (HMRC) on the operation of the rules. The consultation closed yesterday.

"With publication of draft legislation not expected until the summer, businesses with complex supply chains and large flexible workforces will struggle to meet an April 2020 deadline to prepare properly for the reforms; including reviewing and possibly altering their IT and compliance systems," she said.

Tax rules known as 'IR35' require that employment taxes be paid by people who provide services through a PSC if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.

Once the new regime is in force the engaging business will be liable for determining whether the IR35 rules apply and will also be required to operate PAYE and pay employers' National Insurance contributions (NICs). The changes will not apply to small businesses which engage contractors through PSCs. Off-payroll working rules have applied to the public sector since April 2017.

Simmons Penny

Penny Simmons

Legal Director

The proposed changes could have a disproportionate impact on existing projects in the infrastructure and energy sectors, which are heavily reliant on contractors and temporary workers.

"The proposed changes could have a disproportionate impact on existing projects in the infrastructure and energy sectors, which are heavily reliant on contractors and temporary workers, many of whom are engaged through PSCs. Many of these contractors have highly specialised skills and it is crucial that these skills can be easily circulated amongst businesses, particularly in project-based and fast-growing industries," Penny Simmons said.

"Businesses will be faced with a significant compliance and financial burden if they are required to assume IR35 tax risks for contractors engaged through PSCs. Given that profit margins for infrastructure and energy businesses are often very slim, the financial impact is expected to be particularly onerous for companies in these sectors," she said.

"Infrastructure and energy businesses are already encountering growing shortages of skilled labour in some fields, as fewer EU workers are choosing to come to the UK. We anticipate that this issue will be compounded when reforms are introduced to the off-payroll working rules, as the UK may become a less attractive place for such individuals to operate," Simmons said.

HMRC has been advising large and medium sized businesses in the private sector to look at their workforce, including those engaged through agencies and other intermediaries, to identify those individuals who are supplying their services through PSCs. Businesses should then work out if the off-payroll rules apply for any contracts that will extend beyond April 2020.

HMRC has also been advising businesses to start talking to their contractors about whether the off-payroll rules apply to their role.  Businesses should also put processes in place to determine if the off-payroll rules apply to future engagements.

"For businesses with large flexible workforces, preparing for the new regime will take time and they should not delay commencing preparations," Simmons said.