Self-employed or using contractors?

It is estimated about 170,000 self-employed workers will be paying more in tax from April 2020, as the government is expanding the off payroll working rules, known as IR35, to the private sector.

In comments made by HM Revenue & Customs, who published a policy paper on this matter (July 11), in line with what was announced in the last Budget, this estimate now look massively on the low side! The extension of the IR35 rules to the private sector will imply, under law, that contractors who work through their own company are, in practice, deemed as employed by a third party, and should, therefore, pay the right tax as employees.

Tax experts have previously said IR35 can reduce a worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and national insurance contributions.

However, it does not mean the workers will have access to benefits or workplace pensions. The Association of Independent Professionals and the Self-Employed (IPSE) has already criticised the move, stating it could seriously damage British innovation while creating a form of second-class employment. IPSE has argued that extending the off-payroll working rules will put a huge extra burden on organisations which depend on the use of such workers to help them succeed.

With such short notice, the Treasury has left businesses needing to choose between access to the skills they desperately need and trying to rush implementation of rules even HMRC itself does not understand. They will be paying into the system but will be denied any of the protections which go with employment. This fundamentally undermines the principle of no taxation without rights many people understand as the basic fairness in our system.

In April 2017, the government reformed off-payroll working in the public sector and in the Autumn Budget 2017, it announced it would consult on how to tackle the issue in the private sector, leading to a consultation being launched in May 2018. In July 2018, the government made a U-turn on its plan to end Class 2 national insurance contributions for the self-employed, which was announced in the 2016 Budget. The move would have saved millions of self-employed workers £150 a week in national insurance contributions but would have hit the lowest earners, who would have had to make up the shortfall with extra contributions to reach state pension entitlements.

The new rules are expected to be included in the Finance Bill 2019/20.

With the arrival of the draft legislation, it seems very unlikely there will be a U-turn or a delay at this stage. The onus is now on the private sector to prepare for the arrival of these changes next April. With greater clarity over the incoming rules still needed, private sector firms can at least focus fully on preparing for these changes, ensuring they are capable of accurately setting the tax status of contractors.