IR35 is an employment tax that was first introduced in 2000 by Gordon Brown. It is designed to catch people operating in what HMRC describes as ‘disguised employment’; working off the payroll through an intermediary such as a limited company to circumvent having to pay the same rates of income tax and national insurance which would be payable if they were an employee.
If individuals are caught by the IR35 legislation, after a small deduction for expenses they are required to pay the income tax and national insurance contributions (NICs) that would otherwise have been due if they were an employee, which can mean hefty additional tax bills. However, the IR35 legislation has never been consistently monitored and implemented by HMRC and in a recent press release they acknowledged that the problem is widespread, and they suspect at least 10% of people working through personal service companies (PSCs) should be on the payroll.
According to their calculations, the practice could be costing them up to £1.2bn a year by 2023 in lost revenues if it continues; we have all read reports of BBC reporters and TV personalities who faced tax repayments of hundreds of thousands of pounds because they were deemed by HMRC to be employees and for failing to apply IR35 to their historic income. In some cases, these individuals have argued they were actually encouraged to work through a PSC because their employer also benefited from lower taxes by not having to pay employers’ NICs.
In order to take action on this matter, HMRC have replaced the IR35 legislation for public sector workers with new ‘off-payroll’ working rules; with effect from April 2017, public sector employers are responsible for deciding whether a contractor should actually be on the payroll and if so, for deducting the appropriate taxes. This moves the responsibility for the tax deduction from the contractor to the contracting company, making it easier for HMRC to monitor and pursue.
To date, this change within the public sector has already generated £410 million in additional revenues for the Treasury. Now HMRC has issued a consultation document under which it proposes to extend these same requirements to the private sector, so that all consultants and contractors working through PSCs or intermediaries, but who bear the hallmarks of employees are taxed in the same way as employees. HMRC say that the consultation is simply to explore how to make these rules work better and that the genuinely self-employed will not be affected.
Serious objections to HMRC’s proposals have been raised due to the already fragile state of the economy as a result of uncertain Brexit negotiations. According to Andy Chamberlain, deputy director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), extending the IR35 reforms to the private sector could “cripple the flexible labour market at a time when the UK economy is already teetering on the edge”. He said that “moving ahead with a measure that will restrict the UK’s flexible labour market – one of our greatest economic advantages – risks damaging the economy at a time when it is already challenging for businesses.”
If these changes are approved, they may come into operation as soon as the next Budget. They will affect contractors including IT consultants, management consultants, and project managers. Anyone who thinks they might face future issues in connection with this new legislation – whether as an employer or as a consultant – should contact us to discuss their circumstances, by emailing partners@rjp.co.uk.