When tax becomes taxing!

In May 2018, the Government launched a consultation that proposes changes to who is responsible for determining the IR35 status of engagements.

There are three proposals, but the preferred approach is to transfer from the contractor to the private sector organisation the responsibility for determining whether the off-payroll rules (IR35) apply to the engagement where an individual is providing their services through an intermediary - in a similar (if not identical) manner to the obligations placed on the public sector from April 2017. If it was determined that the off-payroll rules do apply, the engagement would then be subject to pay as you earn (PAYE) Income tax and Class 1 National Insurance Contributions (NICs) as if it was one of employment.

But what is IR35? These rules were introduced in 2000 to ensure that people working through a personal service company (PSC) who would have been employees if they had been engaged directly, pay broadly the same income tax and NICs as if they were employed.

What’s changed? The Government has estimated that only 10% of individuals working in this way apply the rules properly, costing the Exchequer hundreds of millions of pounds in lost tax revenues every year.

In April 2017, the Government reformed these rules for engagements in the public sector, and its initial research indicates that this has resulted in an increase in public sector compliance but research by IPSE and the CIPD suggests that the changes have not been without some negative consequences.

In the Autumn Budget 2017, the government announced it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector, and it is asking for comments on the best way to do this. Whether the private sector implicitly includes the voluntary sector is somewhat unclear.

There are three proposals, but the preferred approach is to transfer from the contractor to the private sector organisation the responsibility for determining whether IR35 apply to the engagement where an individual is providing their services through an intermediary - in a similar (if not identical) manner to the requirements placed on the public sector.

The second proposal is to strengthening supply chain compliance. Under this proposal, the Government would introduce rules to require clients to assure the compliance of their labour supply chains by carrying out additional checks (full detail available on page 23 of Off Payroll Working in the Private Sector). 

In addition, clients could be required to ask the PSC to provide a completed Check Employment Status for Tax (CEST) determination and to check the outcome against the working practices of the individual carrying out the role in question. These could apply to the simplest situation where the client engages with the PSC directly as well as to the most complex case where there may be a labour supply chain which includes several agencies.

These requirements could be underpinned by some form of penalty, or by denying the client a deduction for the costs of using labour from a supply chain that they have not checked. Alternatively, the checks could be optional, but clients who have not performed them and are later found to have used a non-compliant labour supply chain could be named publicly, meaning that those using unsecured labour supply chains would be running a reputational risk.  

The third proposal from the Government is increasing record keeping obligations. Under this suggestion, new obligations could be placed upon the engager that would be to require the client that make payments (directly or through an agency) to PSCs to retain certain information such as contracts, shift rotas, and line management reporting requirements relating to the engagement. This would allow HMRC to quickly gather such information directly from the client should they later open an enquiry into one or more PSCs.  A framework would be designed that would look to penalise non-compliance.

Full details of these options are available in the consultation document although both have the potential downside of increasing the administrative burden on the engager while failing to directly improve the non-compliance that HMRC are seeking to address.

Certain issues are outside the scope of this consultation, such as whether those who are now deemed to be employees for tax purposes should also get the same employment rights enjoyed by employees.

To help inform our response to these proposals, the CIPD and the CIPP have joined forces to survey our members to understand how the changes could impact both on current people and payroll systems and on HR and/or payroll contractors operating, both in the private and/or voluntary sectors.

Issues covered by our private and voluntary sector practitioner survey include how much experience you have had dealing with IR35 in the past, how ready you think you and your organisation are to deal with it in the future, what support you think you would need to be able to cope with the new requirements, what are your views regarding the CEST tool, and how quickly the changes should be introduced.

The contractor survey can be found here while the HR/payroll practitioner survey can be found here.


Charles Cotton

Senior Performance and Reward Adviser


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  • I have been a consultant (self-employed rather than limited) for over 25 years and on principle never accept work on a PAYE basis.  This has only caused problems on a couple of occasions when an organisation (such as a vocational awarding body) is used to using payroll for (for instance) moderators, and out of habit wants to apply this to work that should be on a contract for services.  However more recently I have found public-sector clients becoming more careful about the type of contract they agree to, to ensure that it is a genuine contract for services.  A problem is being caused by the 'substitutability' test used by HMRC, as where a client has engaged a practitioner to carry out or lead a project because of their specific expertise and track record, it would be a breach of trust to suddenly call in an associate to do the work; I have written to HMRC suggesting that they are overemphasising what is one of several tests of genuine self-employment.  I would be happy to provide more details if useful.