The Summer Budget 2015 contained an announcement that the government is to consult on proposals to improve the effectiveness of the existing intermediaries legislation, commonly known as IR35. The reason for this review was given as the perceived unfairness that two people could be doing the same job and pay very different levels of tax depending on how they are engaged. A consultation document has now been published (Intermediaries Legislation (IR35): discussion document), which sets out the rationale for change, the options to be discussed and the likely next steps.
Because of the interaction between allowances available and rates paid in the corporate and personal tax systems, and the absence of NICs on investment income, including dividends received from personal service companies (PSCs), people who work through their own limited company can often pay a lower effective rate of tax and NICs than either the self-employed or employees. The government estimates that there were around 265,000 PSCs in 2012-13, an increase of 65,000 on the previous year alone. This number is expected to continue to increase over the coming years, particularly given the changes announced at the Summer Budget on the taxation of dividends. The Exchequer estimates that current non-compliance in this area is costing some £430m in tax and NIC receipts each year.
Broadly, the IR35 legislation requires individuals working through an intermediary to pay the same tax and NICs as any other employees, where they would have been an employee if they were providing their services directly. One of the main concerns is that currently HMRC have to enquire into each individual PSC for each individual engagement, even where several PSCs are working for the same engager, often under what appear to be the same terms. Several parties may be involved in the contractual chain in each case and reaching agreement with all of them on their understanding of the contractual arrangements can be complex. HMRC also believe that there is insufficient clarity concerning each party’s responsibility for cooperation with any intervention.
The consultation document indicates that the government is not looking to abolish the IR35 legislation, but reform is needed to protect the Exchequer and level up the current playing field for those who are directly employed and those who would be employed directly if they were not operating through their own company.
Reading between the lines in the consultation document, it seems that the most likely change is that the onus to verify the employment status of an individual will be put on the shoulders of the ‘engager’. This means that those who engage a worker through a PSC would need to consider whether or not IR35 applies, and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees. However, the government recognizes that this would increase the burden on engagers and this option is therefore up for (no doubt heavy) discussion.
There is a great deal of complexity associated with identifying whether or not IR35 applies and the consultation document picks up that clarification is required. One option set out in the consultation document is to consider aligning the IR35 test with that used for temporary workers in the agency rules, which is based on supervision, direction or control. Another option could be to introduce a rule that an engagement must last a certain minimum amount of time to be considered one of employment. Again, these options are going to be considered over the coming months.
The consultation closes at the end of September 2015, so we could see further announcements on this subject as early as the 2015 Autumn Statement.