Off payroll reform - should the private sector expect change?

Keith Hunter

Keith Hunter

Tax Senior Manager

The recent introduction of the off payroll reporting rules in the public sector has impacted the taxation of workers using a limited company as an intermediary, effectively moving the responsibility for deciding whether the IR35 rules apply from the contractor’s limited company to the end client.  

In the public sector, where the end client determines that the off payroll rules apply, there is then an obligation for the end client (or any intermediary agency) to deduct PAYE and Class 1 National Insurance.

Supporting documentation to last year's Autumn Budget announced an impending consultation into the merits of extending the off payroll reporting rules to the private sector.  Although it is unlikely changes will be brought in by April this year as previously predicted, the consultation suggests that it is likely that some form of off payroll reporting or tax deduction requirement will apply to engagements in the private sector in the future.

What should private sector companies do to prepare?

It is worth considering how similar changes to those made in the public sector could affect private service companies, agencies and the end client if such changes are indeed enacted. Under the current rules, for private sector engagements it is the contractor’s responsibility to consider the IR35 tests and ensure that the correct amount of PAYE and Class 1 National Insurance are applied.  This burden could potentially fall to the end client.

HM Revenue & Customs believes that the off payroll rules have increased compliance for contractors working in the public sector, some of whom may not have been correctly applying IR35 in the past.  Going forward, off payroll reporting rules will mean that existing contracts may require to be reviewed.  It is possible that contractors may wish to re-negotiate day rates with the end client, although the scope for this will vary across different industries and will depend on commercial factors. 

In anticipation of possible changes being introduced, businesses using contractors may wish to plan ahead on how they will manage the increased compliance burden of assessing contractor status.  

Contract of Service or Contract for Services?

In the first IR35 case for several years, HMRC has won an appeal against Christa Ackroyd who worked for the BBC though her personal service company, Christa Ackroyd Media Limited. The ruling resulted in a tax and national insurance bill totalling £419,151 covering tax years 2006-07 to 2012-13.  HMRC argued that the hypothetical contract between the BBC and Ms Ackroyd was a contract of service rather than a contract for services.

The complexity of the intermediaries legislation and the status of a worker as employed or self-employed is always an area of concern for businesses and workers alike.  Many consider themselves to work freelance through personal service companies however, there are various factors which must be considered to confirm such status.

Although HMRC have said the recent case against Ms Ackroyd is not a lead case and just one of several appeal cases taking place, businesses are advised to review similar arrangements with non-payroll workers. 

Ms Ackroyd worked as a presenter of a regional news programme, Look North.  She was engaged by the BBC under a 7 year contract, working 225 days a year and the arrangement was only terminable where there was a breach of contract.  The judge stated that the length and continuity of the contract rather than short term engagements ‘points towards a contract of employment’.

Control was another of the main factors that HMRC argued. The BBC controlled the work Ms Ackroyd completed during her normal pattern of hours and requested additional work to be completed when required.  There was also a restriction on the services she could provide as a news presenter to other broadcasting companies and she could not engage in such work without the consent of the BBC.

The tribunal concluded: ‘We do not consider that Ackroyd could fairly be described as being in business on her own account. She was economically dependent on the hypothetical contract with the BBC which took up most if not all of her working time.’

Although it is common practice to work through a personal service company and legitimate to do so, this case displays that where appropriate HMRC can assess individuals for taxes and national insurance as employees where they consider that use of such a company is not valid.  The decision to work through a company is irrelevant where the facts point towards a hypothetical contract of employment and the subsequent tax and national insurance costs if this is found can be significant.

If you would like further information on off payroll reform or the use of personal service companies, please contact one of our Employer Solutions team.