On 6 April 2021, the delayed changes to the off-payroll working rules – known as IR35 – came into effect. Aimed at addressing perceived tax avoidance, these brought the private sector into alignment with the public sector, which saw similar changes implemented in April 2017. In this article, we look at the current state of play almost one year on from the implementation of these changes.

Reminder of the changes

IR35 essentially seeks to tackle tax avoidance in situations where an intermediary, often a personal service company (PSC), is used. Prior to the implementation of IR35, where an individual provided services through an intermediary, both they and the business engaging them were able to make savings on employment taxes which would be due if the individual was employed directly. IR35 seeks to put a halt to this. If the individual engaged would have been considered an employee for tax purposes if there was no intermediary, any payments to the intermediary have to be taxed as if they were remuneration paid to an employee. The changes in 2021 extended the impact of IR35 to intermediaries contracting with private sector clients which are large to medium-sized entities.

One of the key changes implemented in April 2021 was the transfer of responsibility for determining contractors' employment status for tax purposes from the PSC to the private sector business (the end user) engaging the PSC. If a contractor is deemed to fall within the off-payroll working rules, the end user will have to pay the PSC in the same way as their own employees. This means deducting tax and employee National Insurance contributions prior to payment being made and, importantly, paying employer National Insurance contributions on top of contractors' fees.

Implementation: challenges and recommendations

Earlier this month, the National Audit Office (NAO) and the Economic Affairs' Finance Bill Sub-Committee (the Sub-Committee) both reported their findings and conclusions on the impact to date of the off-payroll working reforms. The NAO's report focused on the public sector, whilst the Sub-Committee looked at the roll-out in the private sector. The reports also commented on the current state of implementation, and set out some recommendations for improvements.

The reports drew particular attention to the following themes:

• CEST tool: to provide support to end users, in 2019 HMRC revised its online tool, "Check Employment Status for Tax" (CEST). Whilst this is a useful resource for businesses, both of the reports published this month highlighted the limitations of the tool and recommended that HMRC remedies them. In particular, the Sub-Committee reported that the tool delivers an "unable to determine" outcome in an estimated 20% of cases, and called for this to be addressed moving forward.
• Umbrella companies: in its report, the Sub-Committee criticised the lack of progress regarding the regulation of umbrella companies. It found that the extension of the off-payroll working rules to the private sector in 2021 directly caused an increase in the use of rogue umbrella companies associated with tax avoidance. It argued that the use of such companies often results in low income workers receiving 20% less pay, as the arrangement makes them responsible for their employer's National Insurance contributions. The Sub-Committee called for the UK government to take decisive action in response to this potential trend. 
• Employment status: the Sub-Committee also called for the UK government to take a more decisive approach to employment status. It highlighted that, under the rules, individuals are effectively treated as employees for tax purposes, but do not receive the employment rights usually associated with employee status. It concluded that the UK government should define employment status consistently for both tax and employment rights purposes.
• Disputes: the NAO report flagged the lack of sufficient legal route for workers to dispute the tax status determination made by the relevant end user. At present, the only route for recourse is with the end user organisation itself, or by using HMRC's self-assessment and National Insurance contributions reclaim routes. 
• Non-compliance: the NAO's report also highlighted uncertainty surrounding HMRC's approach to non-compliance within the private sector. It suggested that there is a greater risk that non-compliance will go unnoticed within this sector due to its size and the complexity of supply chains, which make monitoring compliance more difficult than in the public sector. The NAO concluded that there should be a more efficient system to ensure that HMRC is able to accurately and fully collect all taxes which are due.

Conclusion

Almost one year on from the roll-out of the extended off-payroll working rules, it is clear that many feel there remains room for improving their implementation and scope. If HMRC elects to implement further changes in response to the reports from the NAO or the Sub-Committee, it is important that companies keep abreast of the amendments and where to find them, as HMRC will expect companies to take these into account. HMRC has a range of resources available to support companies to navigate off-payroll working rules, including webinars, the CEST tool and guidance notes which are available on the HMRC website.