IR35 pitfalls and current views

Contractors could face a higher tax bill from April 2020 when reforms to IR35 legislation are set to take effect in the private sector.

This is expected to raise more than £3 billion between 2020 and 2024, as self-employed individuals who fall within the rules, and the businesses engaging them, will face a higher tax charge.

IR35 rules were reformed in the public sector in 2017, with the aim of stopping work HMRC regards as ‘disguised employment’.

This describes a situation where an individual works much like an employee, but does so through a company to avoid paying additional income tax and national insurance.

The reforms mean that the responsibility for determining the worker’s employment status will move to the firm engaging them.

Those who are considered an employee under IR35 will have to pay income tax, as well as national insurance at the higher 12% rate.

HMRC says the rules “only affect people working like employees and through a company”, but many contractors are concerned genuinely self-employed people could be affected.

Others argue the administrative burden could result in businesses putting all their contractors under IR35, or discourage them from hiring contractors altogether.

Chris Bryce, chief executive officer at the Association of Independent Professionals and the Self-Employed, called the decision a “fresh raid” on the self-employed.

He said the IR35 rules are “so complex and crude that genuinely self-employed people will be swept up and in many cases taxed out of operation”.

The reforms will not come into effect until 6 April 2020, and to lessen some of the burden on businesses, the smallest 1.5 million firms in the UK will be exempt.

The Chartered Institute of Taxation (CIOT) welcomed these decisions, but said the Government should conduct a wider review of employment status.

Colin Ben-Nathan, chairman of the employment taxes sub-committee at the CIOT, said:

“Off-payroll working is in fact but one facet of a much broader issue of how we tax labour in the UK.

“In our view, IR35, the taxation of the employed vs self-employed, and labour law issues should all be viewed through the same lens and considered together.”

Contact us for advice on IR35.