More Costs on their way for Contractors & Service Companies?

BLOG7th Aug 2018

Aberdeen, more than most, has given much thought to the effects of the off-payroll working rules introduced into the public sector in April 2017, and the potential repercussions if these rules were rolled out into the private sector.

On the 18th of May the government launched the much anticipated, or dreaded, depending on which side of the fence you sit, consultation document regarding “Off-payroll working in the private sector”.

This has essentially confirmed HMRC’s intention to introduce the public sector rules into the private domain. The basis of the consultation rests on HMRC’s motivation to recoup the touted £700 million in tax and National Insurance revenue that is currently being foregone by non-compliance. HMRC speculate that only 10% of people who should comply with the existing private sector IR35 rules are actually doing so. This, coupled with the projection that this figure will rise to £1.2bn by 2022/23, has fuelled another wave of reform.

Following the public sector changes introduced in April 2017, responsibility for compliance with the IR35 legislation has been shifted from the individual contractor, to the public body or recruitment agency. As predicted, this has reportedly triggered an exodus of IT contractors within the public sector, as well as an increase in day rates to compensate for the reduction in take home pay. In spite of this, HMRC have stated that “the available evidence shows that the public sector reform has been effective in tackling non-compliance with the off-payroll working rules”.

In sharp contrast, those at the heart of the changes believe that “chaos and confusion” continues to define public sector reform, so the Government would be taking a huge risk to press on and extend changes to the private sector. In view of this, we believe that instead of a further kneejerk reaction to off-payroll working, the consultation should offer HMRC with an opportunity to thoroughly review the impact of the reform within the private sector, whilst taking into consideration the views of those not only affected directly by the proposed changes, but throughout the supply chain as a whole.

The proposition that we could see the public sector rules integrated into the private sector becomes even more concerning following the decision in the recent case of Jensal Software Ltd v HMRC. In brief, HMRC completely misinterpreted the application of their tripartite employment test; namely mutuality of obligations, substitution, and control, which if applied correctly would have clearly pointed away from a contract of service. Despite this, the revenue chose to pursue the case claiming a sum of £26,000 was due in back taxes. Luckily, this backfired with the tribunal judge finding that the relationship was wholly indicative of a contract of services.

Furthermore (and perhaps worryingly), HMRC’s online “Check Employment Status Tool” which is to be used as the first line in determining employment status does not even incorporate the Mutuality of Obligations test, which is a cornerstone of the employment test. If these rules are to be rolled out universally across all contractors, HMRC must introduce a more dynamic system to assist both contractors and employers alike. Failure to do so is likely to lead to a further round of chaos within the IR35 arena.

Here at AAB we will be monitoring these & contributing to the consultation to ensure that we are well placed to advise both existing, and future clients how they may need to prepare for these potential changes and the impact and costs on their business. In Aberdeen particularly, the costs and changes will hit the heart of contractor and service company businesses, probably for the worse.

For more information please contact Charlotte Stewart ( or your usual AAB contact.

To find out more about Charlotte and the Payroll & Employment Taxes team, click here