Is Changing The IR35 Rules Really The Answer?

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We are going to break this article down into three distinct parts for easier digestion and comprehension. We are first going to outline, briefly, what the IR35 rules are, from there we are then going to succinctly explain what the proposed changes to the rules are. Finally, we are going to conclude by theorising what the impact of these proposed changes may be and if they are necessary in the first place.

What Are The IR35 Rules?

Under the existing IR35 rules, people that are employed through their own personal service companies (commonly referred to as PSC’s) are considered as “off payroll“. In other words, they are not direct employees of the public sector body but are in fact third party contractors. Under these rules the public sector body has no need to account for PAYE or National Insurance Contributions on payments it makes for their services. It is down to the individual contractor to decide whether the work they are undertaking via their PCS falls within the IR35 rules and, if so, to then account for the PAYE and National Insurance Contributions on the payments the PSC obtains for that labor (as it was salary paid to the contractor).

What Are the Proposed Changes?

Under the new rules, it’s the public sector body or agency in the supply chain that will have the responsibility of determining whether the IR35 applies.

Impact Of The Changes

For the public sector body or agency, determining a person’s status for IR35 purposes is not as straight forward as it would seemingly appear. HMRC understands this and to help they are creating an automated tool, which is scheduled to be released in April 2017. However, even with the introduction of the tool, determining IR35 status will likely still not be that simple at all.

As a result of this added complexity it is not unreasonable to assume that public bodies and agencies will increasingly choose to just deduct PAYE and National Insurance Contribution in most situations, in a sense, playing it safe. However, this will then leave the contractor/PSC to file complaints/amendments if they do not agree that the deduction should apply.

Some public sector bodies may even decide that the added complexity is so great that it would make sense for them to do away with everything all together and move everyone onto their standard payroll system, as traditional, salaried employees.

A further consequence of the changes may be that current contractors for whom the IR35 guidelines do not apply may choose to leave the public sector entirely and opt for working in the private sector. In the private sector they can essentially decide on the matter for themselves and so not have PAYE and National Insurance Contributions deducted where they are not due. That is, unless the public sector decides to increase wages to compensate which is something that we think would be highly unlikely.

Are the Changes Really Needed?

According to KPMG, the major motivation for this reform is that it will bring in an estimated “£20-£25 million” in annual tax for HMRC. However, this arguably seems to be quite a large, costly, and complicated overhaul for, as some may say, a modest tax increase. So, the main argument here is related to whether the overhaul is worth the tax increase or not.

However, there is another argument and that is that this first overhaul could be just the first, a pilot if you will, of a large string of changes that the government seeks to apply across the public as well as private sectors. In which case, it could be argued that this first overhaul is justified as it fits into a much bigger strategy.

You can learn more about the IR35 changes from the official GOV.UK site here, and here.

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