Contractors are set to pay more tax from 2020. Chancellor of the Exchequer, Philip Hammond, finally announced changes to IR35 in the private sector.
The move targets contractors and freelancers who set themselves up as private companies to take on work. HMRC deem them to be paying less tax where they undertake the same role as an employee.
The Treasury believes a third of people claiming self-employed status through a Personal Service Company (PSC) are actually employees. As a result of this they believe they should pay more tax. It said that continuing non-compliance with tax rules could cost HMRC £1.2 billion a year by 2023.
In a bid to clamp down on the perceived issue, Hammond is making private firms with more than 250 employees responsible for checking contractors’ IR35 status. They will be liable for paying back dated tax, NI and fines if they get it wrong - which is where worries of blanket determinations arise. This is a shift in liability away from a contractor being able to decide their own IR35 status, as they currently do.
A similar burden of responsibility was put on public sector organisations in April 2017. This was to ensure that contractors who work through their own limited company, and who work via an intermediary pay correct and full taxes.
“Last year we changed the way these rules are enforced in the public sector, but widespread non-compliance also exists in the private sector,” Hammond said. “Following our consultation, we will now apply the same changes to private sector organisations as well.”
Is it too soon for IR35 reform?
The government only finished its consultation process into ‘Off-payroll working in the private sector’ in August. Many said that IR35 reform now would be a rash move. The government though is yet to even publish an outcome document on the consultation.
“We believe that coming to any kind of concrete conclusion about how the Intermediaries legislation in the private sector should change (it has been largely untouched since it took effect almost two decades ago), in such a short timeframe, would be a very rash decision,” John Payne, managing director of contractor accountancy firm Churchill Knight & Associates, wrote for Contractor UK ahead of the Budget.
“But as we know with previous legislation affecting the contractor sector (Off-payroll rules in the public sector, and the Travel and Subsistence ‘SDC’ framework), investing sufficient time is not a prerequisite of rolling out new legislation, at least where it is aimed at tackling alleged tax avoidance.”
Some time to prepare
Contractors do have until April 2020 to prepare themselves for the impending changes. Preparation and learning will be key to ensure that genuine contractors continue to operate outside IR35.
“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 size businesses,” Hammond said.
The Chancellor said the new rules will ensure fairness. At the moment, for example, an individual earning £50,000 a year through a limited company can pay as little as £2,000 in taxes, compared to a worker in full employment who has to pay £13,000. Where these statistics come from we have no idea. Genuine contractors know that this is clearly not the case. Yet HMRC continue to peddle such facts in an attempt to push home their agenda.
But some fear it will have a severe impact on their business. Tax experts calculate that the new rules could reduce a worker’s net income by as much as 25%. And, like what has already happened in the public sector, many face the prospect of blanket IR35 assessments. History shows that end clients will take a risk adverse approach to limit their liability.
“There is a difficulty in rolling out the IR35 changes to the private sector in that the nature of relationships with freelancers is far more complicated than in the public sector. Whilst the delay of implementation is a welcome relief, I hope that during the delay the government review the practicalities of implementing these changes, and the negative impact that this could have on genuinely independent contractors,” Carl Reader, founder of consultancy firm D&T, said to i News.