Chancellor Phillip Hammond presented his budget yesterday to Parliament and announced plans to extend off payroll working rules, known as IR35 tax reforms, to the private sector.

In his speech, Hammond stated, “But after listening carefully to representations made during the consultation, we will delay these changes until April 2020…and we will only apply them to large and medium-sized businesses.”

The off-payroll working IR35 rules were introduced in April 2017 to public sector providers to ensure that contractors who work through their own business, but are in fact employed by a third party, still pay the correct amount of taxes.

The government had announced earlier this year that a public consultation would look at tax avoidance in the private sector. The consultation closed in August.

“Last year, we changed the way these rules are enforced in the Public Sector,” Hammond stated. “But widespread non-compliance also exists in the private sector …So following our consultation, we will now apply the same changes to private sector organisations as well.”

The changes mean that hundreds of thousands of private-sector contractors face higher tax and National Insurance bills from April 2020.

According to the BBC, the private sector IR35 plan is the biggest revenue-raising measure in this year's Budget. IT contractors, engineers and consultants are among those who are expected to be affected.

Critics have said that the reforms would hurt thousands of people who are self-employed, and would burden businesses further. But the Treasury insisted that the reforms would not affect anyone who was genuinely self-employed.

For IR35 to apply, one must work through their own company for another business. If the way a contractor works is similar to an employee of that business, then they would pay income tax, and National Insurance at the 12% rate. However they may not have other employee rights, like maternity leave.

Up to now, the HMRC stated that many contractors in personal service companies had been paying less tax and NationaI Insurance.

From April 2020, larger businesses, such as banks, will take on responsibility for deciding which contractors will need to pay more tax and National Insurance.

The speech said that the new rule will not apply to the smallest 1.5 million businesses with small companies defined in the Companies Act as one with under 50 employees and turnover of less than £6.5 million.

The smaller companies will not be using Personal Service Company (PSC) contractors in large numbers so the exemption will likely not benefit most PSC contractors or users of those contractors.

If someone is deemed to be an employee, the firm using the contractor will also have to pay National Insurance for the first time.

Fiona Coombe, Director of Legal and Regulatory Research at Staffing Industry Analysts, commented, “The announcement that the off-payroll working IR35 rules will be applied to the private sector came as no surprise yesterday. The delay until April 2020 is to be welcomed as is the exemption for small businesses engaging contractors.”

“However, despite the 18-month delay, businesses would be wise to use some of the lessons learned from the public sector and start preparing now, particularly as they enter into new contracts for projects which may continue beyond April 2020,” Coombe said.

SIA has published a report highlighting the experience of one public sector body implementing the off-payroll working rules in 2017 in a case study from Transport for London (TfL) - IR35 and Off-Payroll Working Rules : An Overview.

Peter Reagan, Director, Contingent Workforce Strategies & Research for EMEA and APAC, Staffing Industry Analysts, also commented on preparing for the upcoming changes in 2020.

“A delayed implementation of IR35 in the private sector should not be taken as a reason to become complacent in preparing your business and supply chain for change,” Reagan said. “There is significant case study and learnings that everyone can take from the public sector, so organisations would be foolish not take this as an opportunity to get ahead of the curve and put processes and procedures in place to ensure compliance by April 2020. Hopefully the lessons from GDPR, and the last-minute efforts to become compliant, will serve as a reminder of this fact.”

Chief Executive of the Recruitment and Employment Confederation Neil Carberry also commented, “Recruitment professionals have said the implementation of IR35 in the public sector have not gone as planned – and has fuelled tax avoidance by the unscrupulous, so now is a good time to pause for thought.”

Carberry added that the delay to 2020 “must now be used as an opportunity to get any future reform right, not just a delay.”

Julia Kermode, Chief Executive of The Freelancer & Contractor Services Association, also commented, “Today’s announcement to delay the roll-out until 2020 shows that the Treasury has listened to the concerns of stakeholders like ourselves who have been campaigning hard and will give us time to work more with policymakers to ensure they get it right.  A delay will give businesses and freelancers time to prepare for the inevitable complexities of implementation.”

“In an interesting move, the Chancellor decided to level the playing field between public and private sectors, but only for large and medium businesses, thus letting SMEs off the hook,” Kermode said. “This is somewhat foolhardy given that large businesses are precisely the ones that are least well-placed to accommodate the change due to the impact on their IT infrastructure should they need to process deemed payments to their contractors.” 

The Treasury estimates that the changes will bring in an additional £2.9 billion by 2024. When similar changes were brought in to the public sector last year, HMRC raised an extra £550 million in tax and National Insurance.

The Budget also made a number of other announcements, including an increase to the National Living Wage, from £7.83 an hour to £8.21. This is set to benefit approximately 2.4 million workers.

• Personal Allowance, which is the amount one earns before they have to start paying income tax, will increase by a further £650 in April 2019 to £12,500. The higher rate income tax threshold, the point at which people start paying tax at 40%, to rise from £46,350 to £50,000 in April.

The Budget also announced further changes to the apprenticeship levy.

From April 2019, large businesses will be able to invest up to 25% of their apprenticeship levy to support apprentices in their supply chain. Some employers will pay half of what they currently pay for apprenticeship training - from 10% to 5%. The government will pay the remaining 95%.

Carberry commented, “The recognition that the Apprenticeship Levy must be more flexible and work better for employers is good news. Reducing the contribution levels for SMEs will help, but it’s disappointing that we still lack the flexibility needed to ensure training is available for temporary staff.”

“All workers should have opportunities to progress, irrespective of what type of contract they are on. We want to work with government to ensure that the levy works better for employers and for all workers who want to upskill,” Carberry said.