On 17 July 2015 HMRC published a discussion document on IR35, the legislation introduced in 2000 to tackle disguised employment. By being employed through an intermediary – often a "Personal Service Company" (PSC) – individuals can reduce the amount of income tax and National Insurance Contributions (NICs) they pay. All employees must pay NICs, for example, but no NICs arise on dividends received from PSCs.
IR35 was therefore brought in to ensure individuals working through intermediaries pay the same tax and NICs as other employees. But, with growing evidence of non-compliance with IR35, HMRC's discussion document is the government's latest attempt to improve the system. These changes are in addition to those being brought in for dividend taxation which will also apply to PSCs from April 2016.
The discussion document is in three parts. The first part covers the rationale for change, looking at the general employment tax system, the existing IR35 legislation, non-compliance, and the cost of non-compliance. The second part looks at the options for change, the objectives behind reform, together with various options already under consideration. The final part sets out the next steps, the questions on which the government wants to hear stakeholders' views, as well as the procedure for submitting these views.
If you engage workers through an intermediary, or are yourself engaged through an intermediary, these proposals, if enacted, are a game changer as they will mean the amount received net of tax will be lower than has otherwise been the case for a considerable period of time. HMRC is considering representations made on IR35 generally, and particularly the possibilities both of PSC engagers taking greater responsibility for determining if IR35 applies, and of aligning the IR35 test with the 'supervision, direction and control' test for temporary workers in the agency rules. A full consultation is expected to follow. - Watch this space!