The budget delivered by Philip Hammond on 29 October included two key issues for employers.
Brief overview of IR35
"Off-payroll working" (more commonly known as "IR35" after the reference number of the HMRC Press Release announcing the rules in Budget 1999) applies where:
- individuals provide their services to an end-client via an intermediary (typically a personal service company (PSC)); and
- in the absence of the intermediary, the relationship between the individual and the end-client would amount - in practice - to employment.
Where IR35 applies, the individual's income tax and NICs liability needs to be broadly equivalent to that of an employee, and it imposes PAYE and NICs obligations on the intermediary.
In April 2017, changes were made to the application of IR35 in the public sector. Broadly speaking, where a public authority engages a contractor, it is the public authority (rather than the intermediary company) which is now responsible for determining whether the individual falls within IR35 - and (if so) the public authority is now responsible for accounting for tax and employee and employer's NICs, and operating PAYE, rather than the intermediary company.
IR35 - private sector
Inevitably, there was always going to be the risk that the private sector would eventually be subject to the same rules as the public sector, particularly as there was concern of widespread non-compliance with IR35.
The Chancellor has announced an extension of the public sector rules to the private sector - although implementation has been delayed until April 2020 to give individuals and businesses more time to prepare.
Interestingly, the government has confirmed that these reforms will not apply to the smallest (£1.5 million and under) businesses, to minimise the administrative burden for the vast majority of "engagers". It has also been confirmed that support and guidance to medium and large organisations will be provided by HMRC ahead of the implementation of the reforms.
Implications for businesses in the private sector
Businesses which use contractors via personal services companies should start to review their working arrangements now, and be aware of the risk of any of those arrangements being deemed to be "disguised employment" under the IR35 rules.
That risk will depend on the overall nature of the relationship, but key issues to consider include whether the arrangement is essentially full-time, the degree of the service provider's integration into the business, and whether there is a genuine right of substitution.
Businesses should also review the terms on which they are prepared to engage contractors. Many Services Contracts contain indemnities from the intermediary company against tax and NIC assessments, but such indemnities may not be worth much in practice as the intermediary company is unlikely to have any assets. To guard against this, more and more businesses are now requiring the contractor to guarantee the intermediary's obligations and indemnities set out in the Services Contract.
NICs on termination payments
The government's proposal, included first in a draft bill published on 5 December 2016, to align the rules for tax and employer NICs by requiring an employer to pay NICs on any part of a termination payment that exceeds the £30,000 tax-free threshold has been delayed. The government still intends to legislate for this reform, but it will not take effect until April 2020.