The Budget - Personal Service Companies, Tax And Employment Status

In last Wednesday's Budget, the Chancellor confirmed that the Government intends to consult on extending to the private sector the amendments to IR35 which were introduced to the public sector in April this year. Although the consultation has not yet been launched, it now seems inevitable that changes will come into force for the private sector, possibly as early as 2019, so businesses need to be prepared.

What might change?

At present, if an individual provides services to a business through a personal service company ("PSC"), the individual is responsible for applying the IR35 rules and determining whether the nature of the relationship with the end user business would be one of employment in the absence of the PSC. If he determines that it would be, the PSC is required to account for income tax and national insurance contributions ("NICs") on the income received. If reforms mirror those implemented in the public sector, the onus will instead fall on the end user business to determine deemed employment status and then to account for income tax and NICs in respect of any payments made to the PSC. What would this mean for businesses?

The potential changes would have a number of implications:

There would be a significant additional administrative burden on businesses who engage contractors via PSCs. They will need to obtain additional information about the relationship between the contractor and the PSC in order to establish employment status. There is an online tool provided by HMRC to assist with this, but going through the questions on that tool in relation to every contractor is potentially very onerous. Any new regime is likely to increase costs for businesses which use contractors via PSCs as they may become liable for employers' NICs in relation to those contractors. This cost could be passed onto the PSC as part of the fee negotiations in relation to new contracts and existing contracts may need to be renegotiated to reflect this additional cost. Any changes may lead to a move away from the PSC model as it is viewed as a less effective tax efficient structure. Instead, contractors may seek to contract directly with end users, which increases the risk of subsequent employment status disputes...