You must have heard of IR35! It’s been a hot potato for many years, but the chickens have now come home to roost. That’s the end of the puns, we promise.
The issue is that there’s always been a tension between collecting the tax that is legally and fairly due and providing flexibility in the workplace; this is particularly important for fledgling, fast-growth companies.
The consultation on the “off-payroll” rules was expected. We knew the public sector rules would be extended to the private sector, and a recently-published consultation document sets out for the first time some of the details.
What are the headlines? First, HMRC has recognised that the simple model of a personal service company (aka “one-man band”) working directly for an end user does not reflect the reality of what happens in practice, when there can be a long supply chain between the person doing the work and the business that they are working for. The consultation deals with this by looking at the responsibilities of the parties in the chain and the way that information has to be passed between them. IR35 does not cope with supply chains so this acknowledgement of the reality of the situation is welcome.
There is a welcome exemption for “small” businesses; they will not have to apply the rules and the personal service company will still have to decide whether IR35 applies. The aim is to reduce the administrative burden on small businesses. Good news on the face of it, but it might lead to additional complexity as businesses have to decide whether they have to apply the new rules or whether they’re simply exempt. Might it also create a two-tier market, with individuals operating through service companies deciding on which contracts to take based on the size of the end user’s business?
Why is this happening? One cannot argue that Governments needs to collect the tax and national insurance that is rightly due, and most people agree that there’s more opportunity for (legitimate) tax planning where services are provided through one or more personal service companies, rather than directly as an employee.
But on the other hand, many businesses, particularly early-stage or fast-changing ones, need flexibility and do not want to commit to a permanent workforce. In addition, their need for specialist skills may change as a project develops.
In our view there isn’t really a right or wrong answer. We will leave it to you to decide what you think the best solution is. All we want is that whatever ultimately transpires, it’s clear, simple, and unambiguous.
But it’s the tax system we’re talking about…