The imminent death of the Personal Service Company [PSC]?
Never mind the prospect [Certainty? Ed.] of a Corbyn led government in April 2020, a further and potentially far reaching erosion of entrepreneurism also occurs on that same date, with the introduction of the off-payroll rules [known as IR35] to the private sector.
The Budget in 2018 announced that from April 2020 businesses in the private sector will become responsible for assessing an individual’s employment status and determining whether or not the off-payroll rules apply. In cases where the business does consider that such rules apply, like it or not, the individual who historically will most likely have operated via a PSC, will be deemed an employee. Goodbye dividends, hello PAYE and NICs!
HMRC has long been concerned that individuals utilising PSCs pay less income tax and NICs then those employed directly. In April 2017 the off-payroll rules were applied to the public sector and will now be extended to the private.
Any private sector business that utilises consultants or contractors who provide their services through limited companies or other intermediaries should now be looking at all such contracts [At what cost to the business? Ed.] to see whether the rules apply.
At the moment compliance with IR35 rests with the PSCs. Currently, it is the PSCs who will be the subject of any HMRC enquiry and demand for tax. This has resulted in HMRC pursuing individual workers and their PSCs for relatively modest amounts of tax.
Under the new rules, the burden of responsibility shifts. It will be the responsibility of the client / end user to assess whether or not IR35 applies and, if it does, ensure that PAYE and NICs are applied to payments made to the PSC. Accordingly, in 2020, HMRC will be able to pursue large employers who are utilising the services of multiple PSCs to recover the same tax for a fraction of the recovery and administrative costs currently being incurred by HMRC-well that is the theory anyway. Large employers will have the financial muscle to challenge the rules as they may apply to their own particular working arrangement with third parties, however, no such employer will want to be the one making legal precedent by losing the test case that HMRC will no doubt bring in the wake of the application of the new rules.
Businesses that are now utilising numerous contractors must now review all such arrangements and change the working relationships where appropriate. The government has its own online employment status checking systems CEST https://www.gov.uk/guidance/check-employment-status-for-tax
which ostensibly is in place to help employers, but it has come under criticism for giving undue weight to certain aspects when assessing whether or not an employment relationship exists or to simply fail to provide a result at all. Such criticisms are noted, but the government is hardly going to show an employer a way round the very rules it wants to implement!
The Taxman cometh-we had all better get used to the fact.