The IR35 seeks to stop the avoidance of tax and National Insurance Contributions (NICs) using intermediaries by requiring the intermediary to pay tax and NICs through the PAYE system.
It seeks to ensure that individuals who work off-payroll through their own company, who would have been taxed as employees had they been engaged directly, pay employment taxes on their income. However, there is evidence of widespread non-compliance, which is estimated to cost the Exchequer £440 million in the tax year 2016-2017.
The proposed reform to the IR35 rules was announced in the Budget 2016 and was the subject of a discussion paper last year.
The reform is intended to tackle non-compliance by moving the liability to make the determination about whether the intermediary rules apply from the intermediary to the engaging party. Under the proposed new rules, the associated tax liability also moves to the engaging party.
The Consultation
The main areas of consultation are:
- The scope of the new rules
The reform applies to the public sector only. The existing rules will continue to apply in the private sector. However, views are sought as to the appropriate definition of public sector and whether it is appropriate to include any private sector bodies (for example, private companies carrying out public functions).
- Deciding whether the rules apply
The consultation paper asks for input on how to make the decision as to whether the intermediary rules apply as certain and simple as possible. The paper confirms that the government is also developing a digital tool in order to seek to address concerns raised by stakeholders that, when faced with any uncertainty, engagers would take an overly cautious approach to the assessment, particularly where liability for tax and NICs, and associated penalties and interest, transfers to them.
- The transfer of liability
The consultation paper asks for views as to the transfer of liability for tax and NICs where the assessment is incorrect and whether different rules should apply where the assessment is incorrect due to false information provided by the intermediary.
The consultation closes on 18 August 2016. The changes to the legislation are expected to apply from April 2017.
Though the new rules will not initially apply to the private sector, this is likely to extend to the private sector in the future.
For more information, please contact Charlotte Williams in our Employment Law team on 0117 314 5219.