The Chancellor has delivered the 2018 UK Budget. Whilst the number of employment tax related announcements were limited there were some significant changes proposed, most notably in relation to off-payroll working arrangements in the private sector.
Set out below is a summary of the key announcements.
Off-Payroll Working in the Private Sector
As widely anticipated following its consultation earlier this year, the Government has announced that it will be reforming the off-payroll working rules (commonly known as “IR35”) in the private sector to increase compliance and bring them into line with changes made for public sector engagements in April 2017.
The IR35 rules apply where individuals provide their services via certain intermediaries (typically a personal service company) in circumstances where, had they been engaged direct, they would have been an employee of the end-client who they are providing their services to. It is the responsibility of the personal service company to determine the application of the rules and, where they apply, PAYE and national insurance liabilities are imposed on the personal service company.
Changes were made to the application of the IR35 rules to public sector engagements in April 2017, moving responsibility for applying the rules away from the personal service company to the end-client receiving the benefit of the individual’s services (or, where there are agencies or other third parties involved in the supply chain, to the third party paying the individual’s personal service company). As a result, the public authority was responsible for determining whether the individual was a “disguised employee” and if so, for operating PAYE and accounting for employee and employer’s national insurance contributions.
A consultation document was published in May this year in which the Government set out a number of options for dealing with on-going, non-compliance with the IR35 rules in the private sector, including an extension of the public sector reforms to the private sector which was announced at the Budget as its preferred option to take forward.
Unlike with the introduction of the public sector reforms, which had a very short lead time, the Government has confirmed that the proposed private sector reforms will not take effect until April 2020, giving businesses more time to develop the necessary systems and procedures needed to comply with the changes. They have also confirmed that the reforms will not apply to the 1.5 million smallest businesses, to which the current IR35 rules will continue to apply. Those individuals currently operating through personal service companies will also be interested in comments made by the Treasury that HMRC will focus its efforts on ensuring businesses comply with the reform, rather than focussing on historic cases and that businesses’ decisions that individuals fall within the rules will not automatically trigger an enquiry into earlier years.
A further consultation on the detailed operation of the reform will be published shortly with draft legislation expected in Summer 2019.
National Insurance Treatment of Termination Payments
The Government has confirmed that it still intends to introduce the previously announced reforms to the national insurance treatment of termination payments, under which amounts in excess of £30,000 will be subject to employer’s (but not employee’s) national insurance contributions. These changes will, however, now take effect from the later date of April 2020.
Two new tests have been added to the qualifying conditions that must be satisfied in order for individuals to claim entrepreneurs’ relief on share disposals taking place on or after 29th October 2018. In addition to an individual holding at least 5% of the voting rights and nominal share capital of the company in question the individual will also need to have a minimum 5% interest in both the distributable profits and the net assets of the company (i.e. the assets available for distribution to equity holders on a winding up) throughout the qualifying period of ownership. The introduction of these new tests will have an adverse effect on many existing structures which were reliant on the old tests.
In addition, there will also be an extension to the qualifying period throughout which the relevant entrepreneurs’ relief conditions must be satisfied, from 12 months to 2 years. This extended period will apply to disposals taking place on or after 6 April 2019 (except where the business ceased trading before 29 October 2018).
Whilst the new qualifying conditions will not impact on the application of entrepreneurs’ relief to shares acquired under qualifying EMI share option arrangements (to which none of the 5% tests apply), the extended 2 year qualifying period is being applied to the specific qualifying conditions that apply to such arrangements. This means that the option and the shares will together have to be held for a two year period.
Short-Term Business Visitors
Following a consultation on the tax and administrative treatment of short-term business visitors from overseas branches of UK headquartered companies, the Government has announced that with effect from 6 April 2020 it will widen eligibility for the short-term business visitor PAYE special arrangement, which allows UK companies to operate an annual PAYE scheme without reporting payments to HMRC in real time and removes the requirement for the individual employee to file a UK self-assessment return. Currently the arrangement is available where the individual spends 30 or fewer work days in the UK in the tax year; from April 2020 this threshold will be increased to 60 or fewer work days. In addition, the reporting and payment deadlines for these arrangements will be extended to provide businesses with more time to gather the relevant information they need in order to apply PAYE accurately.
The Government has announced that from April 2020 access to the employment allowance (which provides businesses and charities with up to £3,000 off their employer national insurance bill) will be restricted to those employers with an employer national insurance contribution bill of less than £100,000 in the previous tax year.