Tax changes forced on self-employed people working in the public sector from 2017 are now set to reduce the take-home pay of 170,000 contractors working for private sector clients.
Self-employed advice site ContractorCalculator estimates the tax increase to be as much as £7,500 for a contractor making £100,000 a year.
This comes at a time when Simply Business data reveals a 31 per cent annual rise in people looking to go self-employed last year.
The cause of this bad news for small businesses? It's IR35 again.
On 11 July 2019 the government published the draft legislation for extending the IR35 rules to the private sector from April 2020. Here are some key points to note if you're a contractor:
We've previously seen the controversial IR35 rules giving rise to court battles, several involving high-profile figures.
Back in May, we asked the question – Does HMRC understand its own tax rules? This came after two separate rulings in favour of self-employed broadcasters: Lorraine Kelly, who won a £1.2 million case, and Kaye Adams, who also successfully argued her IR35 case against the tax man.
And the saga continues, as according to The Telegraph, Talksport presenter Paul Hawksbee won his £140,000 court case over IR35 this month. Ruling against HMRC, the judge noted that Mr Hawksbee had control over his own work, including writing his own jokes.
Whether you’re considered to be a contractor in the true sense of the word or working in the same way as an employee is especially important when it comes to your tax liability. This is because self-employed people usually pay less tax.
And not without good reason – the lower tax bill is justified to make up for the fact that the self-employed get fewer benefits – not to mention less job security.
IR35 was introduced by Gordon Brown back in 2000 to tackle the issue of workers leaving a permanent position on the Friday, only to return as a contractor on the Monday, working the same job, for the same organisation – and, crucially, paying less tax.
This has led HMRC to take the standpoint that if you’re working the job of an employee, you should pay tax in the same way as an employee.
The Telegraph quotes a Treasury spokesman, who said: “It’s right – indeed essential – that individuals working side-by-side in a similar role for the same employer pay the same employment taxes, and our draft legislation cements our commitment to a fair tax system.
“People who are not complying with these rules are not paying their fair share of these employment taxes that would otherwise go into funding our hospitals, schools and other public services.”
However, this way of thinking fails to take into account the benefits employees receive – holiday pay, sick pay, annual leave, maternity leave, for example – which self-employed contractors do not receive.
Hiring organisations who fill roles using contractors pay less in employers’ National Insurance than they would if they recruited permanent employees.
In some cases workers have even claimed they were forced to work as contractors rather than employees so the hiring organisation could lower their employers’ National Insurance bill. The problem is that it's the workers who now face hefty tax bills.
And that's not the only problem to contend with – there's also the issue of illegal ‘blanket ruling’, the term used when organisations apply their decision (inside or outside IR35) to a whole group of workers to avoid the risk of being penalised for getting it wrong.
Genuine contractors, in these cases, are paying tax like employees but without getting the benefits of being an employee.
Dave Chaplin, of advice site ContractorCalculator, said: “The Government says no one who is compliant with the rules will be affected. That simply isn’t true. The rules are structured in such a way that they scare firms into hiring genuinely self-employed people as employees.”
CEO of the Association of Independent Professionals and the Self-Employed (IPSE) Chris Bryce commented: "Recent research shows how crucial freelancers are for companies to create, innovate, improve productivity and compete on the global stage.
"Many [freelancers] now risk being pushed into quasi-employment against their will. They’ll be paying into the system like employees but will be denied any of the protections which go with employment. This fundamentally undermines the principle of no taxation without rights that many people understand as the basic fairness in our system.
"Make no mistake, this is nothing less than an unfair, unnecessary and unworkable tax on the very smallest of business, introduced by government at a time when Britain needs all the flexibility and agility it can get."
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