PAYROLL INSIGHT
‘IR35’ – whatever next?
Justine Riccomini ChFCIPP, head of taxation (Scottish Taxes, Employment and ICAS Tax Community) for ICAS, considers the latest consultation in the context of both the overall employment status debate and feedback from the impact in the private sector
H M Revenue & Customs (HMRC) recently launched a consultation, which closed on 10 August, on whether revised intermediaries (‘IR35’) regulations should be introduced in the private sector. To enable bodies like the Institute of Chartered Accountants of Scotland (ICAS) and the CIPP to respond, it is important to reflect on the initial findings arising from the introduction of these measures into the public sector in April 2017. The public-sector regime places a new deductions and reporting responsibility on the public sector body (PSB) which engages an individual providing services through an intermediary. In addition, the ink is barely dry on the submissions made to the Department for Business, Energy & Industrial Strategy, HM Treasury and HMRC on the employment status consultation (https://bit.ly/2nTDhb5). Under the public-sector regime, the PSB must deduct income tax under pay as you earn (PAYE) and National Insurance contributions (NICs) from the amounts paid to the intermediary where it establishes that the individual would have been classified as an employee were it not for the existence of the intermediary. PSBs are encouraged to utilise HMRC’s check employment status tool (CEST) (https://bit.ly/2mSlIWu) to determine employment status; HMRC maintains that it will “stand by the result given, unless a compliance check finds the information provided isn’t
accurate”. If the payer of the intermediary is a recruiting agency, the agency is responsible for the PAYE tax and NICs where the public authority notifies them that IR35 applies to the arrangement. Previously, the onus was on the individual to determine whether the IR35 legislation applied to them on a case by case basis. ...launched in 2000, IR35 has been an area of great complexity... According to HMRC, around £1.2bn per annum is lost in tax revenues because it estimates just 10% of the businesses that are supposed to be accounting for their income using the IR35 rules are actually doing so. They have concluded this largely because of the exponential rise in new companies via Companies House which only have one director, compared to the small amount of companies that have registered with HMRC as falling under IR35. This tax gap is created because HMRC perceives that most service providers operating through an intermediary such as a limited company are paying themselves a salary roughly equivalent to the income tax personal allowance, which enables them to pay just enough NICs
to qualify for state pension and benefits entitlements, with little or no income tax, whilst taking the rest of their income by way of dividend. The perceived loss to the exchequer is of Class 1 NICs on gross taxable income and any differential payable by way of dividend tax when compared to income tax. From a Scottish perspective, it is in Scotland’s interests to maximise those paying income tax whilst minimising the tax receipts on savings and dividends income. Wales commences its devolved income tax programme from April 2019, so a similar issue will apply there then. On the same day HMRC issued the private sector consultation document it released the findings of a report (https:// bit.ly/2IvjR5b). These go against some of the existing commentary on the public sector IR35 reform, stating that the new regulations had merely a “minimal impact on how public bodies recruit”. According to the report, an almost unanimous (97%) confidence exists amongst the public bodies surveyed that they were compliant with all aspects of the reforms by July 2017, whilst half declared they had experienced very few problems in complying. Compare this, however, to the study by the Chartered Institute of Personnel & Development (CIPD) and the Association of Independent Professionals and the Self Employed (IPSE) which concluded that just over half of public sector hiring managers perceived skills shortages had
| Professional in Payroll, Pensions and Reward | September 2018 | Issue 43 26
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