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Extension of off-payroll rules to PSCs could result in boom for HMRC tax discovery cases

Monday, 2 September, 2019

The extension of the off-payroll working rules to personal service companies (PSCs) in the private sector in April 2020 could produce a windfall of tax discovery cases for HM Revenue & Customs, according to tax consultancy Ross Martin.

From that date, the employment status of an individual contractor working through a PSC will be assessed by the 'end client' – the company at the top of the labour supply chain that ultimately pays for the services. This will apply for both public sector clients and for large companies in the private sector.

If the end client assesses the contractor as caught by the so-called IR35 off-payroll rules, so that the contractor's income tax and national insurance contributions should be deducted at source, and if the same individual has been providing services under the same contract conditions in previous tax years, HMRC may then look back and raise assessments for the six previous tax years under the discovery assessment rules, says Nicola Ross Martin. Discovery time limits are set at four years if there has been any loss of tax, or six years if HMRC suspects the carelessness of the taxpayer or their advisor.

Up to 170,000 PSCs are likely to be affected by the new rules, which HMRC has already begun to enforce ahead of time. Last week, it emerged that it has already begun writing to existing PSC-supplied workers for the largest private sector employers, notably about 1500 IT contractors working for GlaxoSmithKline. The letters state, 'We are writing to you because you told us you were self-employed when you worked for and received payments through your own company... After looking at the information we have for the 2018/19 tax year, our view is that the contract between your PSC and GlaxoSmithKline comes under the [IR35] off-payroll working rules'. It tells recipients to either settle outstanding tax and contributions by 22 September or show that they are not within IR35 by 19 September 2019, or be subjected to an investigation and possible penalties.

Other PSC owners who consider they will be within off-payroll working from next year, and that this would have applied to their current year contracts, should consider making an unprompted IR35 disclosure to HMRC in the hope of avoiding penalties, says Ross Martin. Or they could wait to see if HMRC opens a special IR35 disclosure facility between now and April 2020.

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