As expected, Chancellor Philip Hammond's budget announcement confirmed a firming up of the rules for private companies engaging individuals through personal service companies. The Chancellor confirmed that the off-payroll rules, which already apply to the public sector, will apply to medium and large private businesses from 6 April 2020.
As part of the "off-payroll working in the private sector" consultation (the responses to which were also published this week), the Treasury identified that only 10% of personal service companies (PSCs) that should be applying the "IR35 rules" are currently doing so.
The Treasury have also published an explanatory note which clarifies their position on the use of PSCs:
Contractors who do not comply with the rules pay significantly less income tax and NICs than an equivalent employee. It is fair that two individuals working in the same way pay broadly the same income tax and National Insurance contributions (NICs), even if one of them works through a company.
What the firming up of the rules means in practice is that:
HMRC has already developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply (please see here). HMRC have promised to continue to work with stakeholders to improve the CEST service and guidance before the reform comes into effect. Whilst the service provided by HMRC is helpful, we recommend that you always seek your own independent legal advice in respect of whether the off-payroll rules apply to your specific arrangements.
The current IR35 rules will continue to apply to small businesses.
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