The Association of Recruitment Consultancies (ARC) has described the proposed extension of the public sector IR35 rules to the private sector as a stealth tax which could have significant economic implications.
The Chairman of ARC, Adrian Marlowe, said that while the consultation on the new rules clearly states that IR35 is not a new tax, the way it is being delivered is tantamount to a new form of taxation.
ARC recognises that the Government needs to seek ways of reducing tax avoidance via disguised remuneration but they feel that the new rules for the private sector go far beyond the origins of the IR35 rules, in a move it describes as a “sleight of hand” that attempts to “disguise the reality”.
“Firstly, the five per cent top slice expenses allowance for contractors and arrangements to which the old IR35 rules apply are now to be taxed. This proposal is not a simple scrapping of the allowance, in other words, an adjustment to existing tax rules, because private sector contractors working for small businesses are to retain the five per cent allowance. It is a new charge on the five per cent top slice,” explained Adrian Marlowe.
“Secondly, the imposition of payment of employer’s NICs on the ‘Fee Payer’, being the new deemed employer liable to account for the payments, usually the hirer, did not previously exist under Chapter 8 of the IR35 Rules. It is entirely new.
“Thirdly, the amount of employer NICs, employee NICs and PAYE will now be calculated on the gross sum of the contractor’s invoice for work charged. This is also new as PAYE and NICs due from a contractor’s company under Chapter 8 would be calculated on the net sums, always less than the full invoice sum, even if you don’t take into account the five per cent top slice allowance.”
ARC has indicated that as a result of this, HM Revenue & Customs (HMRC) will receive a significant uplift of PAYE and NICs from liable parties over and above the amounts that HMRC could have expected under Chapter 8.
Under the proposed legislation, which is due to come into force in April 2020, payments will be classed as being in respect of a deemed employment, thus adding the charge to payroll.
ARC says that this will create a new tax, which also has the effect of requiring an additional new payment of apprenticeship levy on the invoice for work charged for those who are mandated to make payments.
ARC added: “For all the reasons mentioned the premise of the consultation, that it is merely a means of enforcing Chapter 8, is entirely incorrect and regrettably misleading. The government should revisit the entire proposal.”