Extending ‘off-payroll’ worker reforms to the private sector

It is common practice for a worker to provide their services to a client through a personal service company (“PSC”) – that is, a company owned and controlled by the worker. IR35 enables HMRC to ask whether, ignoring the existence of the PSC, the worker would be an employee of the client. If the answer is yes, where the worker is providing their services to the private sector, IR35 requires the PSC to pay PAYE and national insurance contributions (NICs) on broadly the fees that it receives less certain statutory deductions.

With effect from April 2017, IR35 was amended where a worker provides their services via a PSC to the public sector. Under the new regime, the public sector client – rather than the PSC – is generally responsible for deciding whether IR35 applies and, if so, operating PAYE and NICs.

The consultation announced in the Budget will consider whether these public sector reforms should be extended to the private sector. In other words, it will consider whether the responsibility for determining whether IR35 applies and, if so, operating PAYE and NICs should fall on the private sector client.

This will be controversial exercise. The public sector reforms have produced widespread confusion and, in many cases, have led to contractors either leaving the public sector or becoming employees. While extending the reforms to the private sector may help to level the playing field between it and the public sector, this would be a significant change that would only increase burdens and costs on businesses.