HMRC estimates compliance in off-payroll working will increase now the rules have been extended to the private sector, but costs of non-compliance will still be high.
The reforms, known as IR35, announced in the Budget Statement, aim to bring the private sector in line with the public sector.
HMRC has published a fact sheet summarising the changes and said the reform has already raised £550m in income tax and National Insurance Contributions (NICs) in its first year of operation since it was initially introduced in 2017. But, HMRC estimates the cost of non-compliance will reach £1.3bn a year by 2023-24.
However the reform does not apply to the self-employed and does not introduce a new tax, but the existing rules will continue to apply to the 1,500,000 smallest businesses.
So from 6 April 2020, medium and large businesses will need to decide whether the rules apply to an engagement with individuals who work through their own company.
Where it is determined that the rules do apply, the business, agency, or third party paying the worker’s company will need to deduct income tax and employee NICs and pay employer NICs.
HMRC developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply. HMRC will continue to work with stakeholders to further improve the CEST service and guidance before the reform comes into effect.
HMRC continues to work with stakeholders to identify improvements to CEST and wider guidance to ensure it meets the needs of the private sector - enhancements will be tested with stakeholders, operational and legal experts before the reform is implemented.
The reform is not retrospective and as it has in the public sector, HMRC will focus its efforts on ensuring businesses comply with the reform rather than focusing on historic cases.
HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform. As well as this, businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years.
The reform will not stop anyone working through a company if that suits them, and does not apply to the self-employed.
The government will continue to monitor tax receipts as data becomes available.
A further consultation on the detailed operation of the reform will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019.