Off-payroll working in the private sector

The off-payroll working rules have been mired in controversy, and they will extend to the private sector next month. 

Since being rolled out to the public sector in April 2017, HMRC has lost five out of six high-profile tribunals against celebrities.  

TV host Lorraine Kelly had HMRC for breakfast after a judge found a contract between her and ITV was outside of IR35. 

Loose Women presenter Kaye Adams won her case after proving she had plenty of other freelance jobs alongside a contract with the BBC.

The Revenue’s check employment status for tax (CEST) test has also come under fire for not being fit for purpose. 

Even what HMRC deemed to be a subsequent upgrade to its CEST tool has continued to draw criticism from campaign groups. 

Concerns over extending the rules to the private sector peaked when the Government ordered a review in January 2020.

Despite the lack of time before the changes kick in and no independent chair, it’s full steam ahead in the private sector from next month. 

Background to the off-payroll working rules

IR35 applies to all contractors and freelancers that don’t fall under HMRC’s definition of being self-employed. 

The measure aims to stop workers supplying services through an intermediary, such as a public service company (PSC), but who would be taxed as an employee if the intermediary was not used.

First introduced back in 2000 by former chancellor Gordon Brown, it attempts to stop self-employed contractors paying themselves in dividends from their own PSCs. 

How does this apply to the private sector?

The rule means that contractors, such as IT or management consultants who work through their own PSCs but are technically employed by a third-party organisation, pay income tax in the same way as employees. 

From April, every medium and large business in the private sector assumes responsibility for setting the tax status for contractors they use. 

Medium and large firms are those with an annual turnover of more than £10.2 million, a balance sheet total exceeding £5.1m, and 50-plus employees.

The rule only applies to payments made by private-sector businesses or agencies for services provided on or after 6 April 2020, not retrospectively.

Services supplied to smaller businesses than these will qualify for the small business exemption. 

This means the contractor continues to be responsible for determining their own tax status from April.

Who does it affect?

HMRC reckons the measure is expected to affect around 170,000 contractors who work through their own PSCs. 

Up to 60,000 private-sector organisations are in the scope of the reformed off-payroll working rules. 

And around 20,000 agencies who supply workers to the medium and large private-sector businesses are also affected. 

The majority of large organisations, and a high volume of medium-sized organisations, who engage off-payroll workers do so through agencies.

As such, private-sector firms and contractors were united in opposing the changes prior to the publication of last month’s report. 

Tax experts expect the rollout of the off-payroll working rules to reduce a worker’s take-home income by as much as 25%.

As a result, contractors operating through a limited company face paying a lot more in income tax and national insurance contributions.

For detailed advice on how the off-payroll working rules may apply to you, contact us on info@stapletonsaccountants.co.uk or call 01363 773191 and ask for our personal tax planning service.