Insights

A recent case brought against three BBC presenters highlights that if private sector contractors fall foul of the IR35 rules, they could be in for an expensive tax demand. These individuals now face tax bills of £930,000 because HMRC has argued successfully that they worked through personal service companies (PSC) in order to avoid paying employment taxes. In all three cases, the presenters claimed that they were obliged by the BBC to continue their self-employed status, even though they were effectively employed under the revised IR35 rules and should have been taxed at source.

These rulings are based on the current IR35 legislation, which is being overhauled, with new rules affecting private sector workers due to become operational in April 2020. The new IR35 legislation is an important change to be aware of because it represents an additional, and quite onerous compliance responsibility for companies engaging contractors.

People working as private sector contractors through limited companies will need to be taxed as employees from April 2020 if they fall within the IR35 rules; the responsibility for establishing whether they fall within the rules and, if so,  ensuring the correct tax is deducted, will now reside with the engaging organisation rather than with the contractor. However, this doesn’t mean that the contractor faces no risks. If there is a tax underpayment, they could still be penalised, because in some circumstances, the liability to account for income tax and NICs can be transferred directly to them.

Given that most contractors tend to be higher or even additional rate taxpayers, being taxed at source potentially has big financial implications for both the worker and for their employing organisation. Even though dividend tax breaks for close company directors have slowly been eroded, it is still more tax efficient for a contractor or consultant to operate through a limited company than join the payroll as an employee.

Added to this, many organisations prefer to engage contractors for short term projects to get access to their specialist skills because it can be far more cost effective than increasing their employee headcount. These new rules create an additional compliance burden and as a result, HMRC are providing support and guidance.

If you are a contractor working for private sector companies, or if you are a company that uses the services of contractors through their personal service companies, it is important to revise your policies well before the operational date of April 2020.

For practical advice on the IR35 rules, please contact partners@rjp.co.uk