The October 2018 budget brought with it confirmation that IR35 rules changes, introduced for the public sector in April 2017, will come into force for medium and large private sector businesses from April 2020. The definition of medium and large, however, remains unspecified.
Organisations in the public sector, such as NHS Trusts and the BBC, are required to examine their arrangements with workers who supply services through intermediaries, including personal service companies (PSCs). Businesses must judge for themselves whether, save for the intermediary, the arrangement would be one of employment. Now, certain private sector organisations must follow suit.
The private sector ought to benefit from the lessons learned from the public sector; plus, employers will have had nearly 18 months to prepare. In particular, organisations should take full advantage of HM Revenue and Custom’s (HMRC) online Check Employment Status Tool (CEST).
However, CEST has caused problems in the past, because converting something as subjective as employment status into algorithms, perhaps unsurprisingly, has proven more difficult than expected. A lot of work has been done, though doubts as to CEST’s reliability remain. One key issue is that the concept of ‘mutuality of obligation’, an important test in deciding employment status, has been omitted from the tool.
Experience suggests that private sector businesses are likely to require all of the extra time afforded to them to prepare for the change. Getting it wrong could result in significant liabilities to tax, national insurance, interest and penalties. We strongly recommend that any business paying workers through intermediaries identifies those contracts that are at risk and ensures steps are in place to operate PAYE, where appropriate, from 6 April 2020.
The overuse of intermediaries is a concern to the Treasury, with HMRC estimating that as many as 90% of PSCs have been failing to operate the rules correctly, costing the public purse £400 million, according to its Off-payroll working in the private sector consultation document, published in May 2018. Employers must, therefore, be prepared for scrutiny ahead.
Nigel Morris is employment tax director at MHA MacIntyre Hudson