Private sector Off-Payroll expected to net £3bn
Whilst higher earners and the NHS were amongst the largest beneficiaries of Philip Hammond’s “giveaway” Budget on Monday, contractors have been left licking their wounds after Treasury figures have confirmed that limited company contractors will be helping to fund Mr Hammond’s munificence to the tune of just under £3 billion over the next 5 years via extensions to Off-Payroll: the single biggest revenue-earning measure introduced in this autumn’s Red Book.
The Off-Payroll rules introduced in April 2017 shifted the responsibility for IR35 assessment and the corresponding PAYE obligations to end-clients in the public sector. The rules have been received with controversy in the contract sector as many believe that public sector bodies were unprepared for the complex compliance burden that IR35 assessment represents, have not received enough guidance from the likes of HMRC and some are even resorting to a default “inside IR35” position to avoid compliance overheads and the risk of tax bills should they get it wrong. Monday’s Budget confirmed an extension of these rules to cover the private sector, taking effect from April 2020.
Analysis of the Budget “scorecard”, the table of figures contained within the budget document that outlines the cost or savings of individual policy decisions to the Exchequer, reveals that the Chancellor expects a bumper haul from the private sector roll-out of the Off-Payroll rules, peaking at £1.2 billion in 2020-21 alone. Although many contractors are pleased with the delay to the roll-out from the previously anticipated date of April 2019, these figures show in real terms just how large the extent of the impact of the roll-out to the contracting sector is expected to be, and the perception within the Treasury of the amount of lost tax revenue that results from avoidance using limited companies.
Of particular concern to contractors is the government’s response to their recent consultation on extending Off-Payroll to the private sector, published following the Budget announcement on Monday. Many of the concerns raised do not seem to have been addressed at all, and the wrapping up of the consultation before the completion of an entire compliance cycle makes it difficult to find credible the government’s branding of the public sector experiment a success. There is also still a large degree of uncertainty as to exactly how the private sector rules will work: “We don’t actually know how the rules for the private sector are going to work and do not have certainty,” said IR35 specialists Bauer & Cottrell. The Association of Independent Professionals and the Self-Employed agreed, saying that PSCs are now locked in a “holding pattern of despair”.
Given the amount of revenue predicted by the figures, it is unlikely that the new rules will be kind to contractors, who will be effectively powerless to prevent PAYE being applied to their remittance should their client decide that they are caught by IR35. Some clients may even forgo IR35 assessments altogether and simply opt to pay all contractors via PAYE, although commercially this may restrict the quality of the contractors that they have access to – that all would depend on how contractors themselves react to such developments.
Aside from the extension of Off-Payroll to the private sector, other measures expected to reap substantial savings are the extension of the Universal Credit implementation period to December 2023 (£2bn), changes to special rate Capital Allowances (£1.6bn) and a delay to the implementation of the National Insurance Contributions bill, which, as announced in September, will also no longer abolish Class 2 NICs (£1.5bn). However, most of the Chancellor’s extravagance was funded by higher than anticipated tax receipts and an improved outlook for employment, funds which could have been used to help balance the budget via a reduction in the National Debt.
2nd November 2018.