Will HMRC’s contractor tax hit you?
IR35 is a piece of legislation targeting tax avoidance through ‘disguised employment’ – where self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance, instead of being taxed like an employed worker.
Essentially, with IR35 HMRC doesn’t target business to business relationships – like that between a company and another company, or a company and a freelancer, but business relationships that in fact resemble an employer and an employee. However, those that have to pay won’t get the same rights as an employee.
Then-chancellor Gordon Brown introduced it in 1999, with the aim of collecting an extra £200 million in National Insurance payments a year. However, HMRC only collected £1.5 million a year between 2002/2003 and 2007/2008, according to a Professional Contractors Group Freedom of Information request.
Despite this, current chancellor Philip Hammond used the November 2016 Autumn Statement to confirm that public bodies engaging contractors will be responsible for IR35 enforcement from April 2017 (it came into force on 6 April).
The statement read: “The government believes public sector bodies have a duty to ensure that those who work for them pay the right amount of tax. This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.”
No private sector change has yet been mooted, but rumours suggest it’s in the pipeline.
How could it affect me?
Contractors could lose up to 25% of their money with IR35, according to ContractorCalculator.
But half of all contractors will never go full-time with a company despite the changes, according to tax advisor Qdos Contractor’s survey of 1,947 UK contractors.
While 95% believed IR35 will make being self-employed less advantageous, just 4% said they plan to switch to working directly for a company.
However, 85% of contractors said they would quit the public sector and work for private sector firms instead.
Qdos CEO Seb Maley said: “Understandably, contractors are feeling threatened by incoming IR35 changes, with many planning to stop working on public sector contracts should they be caught by the new IR35 rules.
“With the right guidance and support though, the UK’s contractor workforce should be able to continue to benefit from working independently – and in the public sector – without the fear of wrongly being deemed inside IR35 by public sector clients.”
How do I know if IR35 applies to me?
The legislation makes the public bodies hiring contractors and the contractors themselves responsible for identifying if IR35 applies.
HMRC’s definitions of IR35 workers are fuzzy, but if you work onsite with your client, who supplies your equipment, manages you, and if you lead a team of employees who work for the client, IR35 probably will hit you.
The tax office has provided a beta version of an online tool to help you determine your tax status as a contractor through a series of questions, but ContractorCalculator found that it got more than a third of 21 historic IR35 court cases incorrect.
CEO Dave Chaplin said: “The tool states that ‘HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate’, which is no guarantee at all, because they just have to say ‘you are wrong’ and it doesn’t count for anything.”
What happens to the public sector?
Perhaps more so than the private sector, government and public bodies rely heavily on IT contractors, meaning many resources could be put at risk by the enforcement of IR35.
Surveying 2,000 UK contractors in April 2017, Qdos Contractor found that 85% of them would quit public sector roles if IR35 were deemed to apply to them. Just under half of respondents were working on public sector contracts, and 80% believed their clients were not ready to enforce it properly.
Qdos Contractor CEO, Seb Maley, said: “Reports claim HMRC expects that 20,000 public sector contractors will be affected by IR35 reform. But this figure seems very low. Our research highlighted that 42% of contractors surveyed worked on public sector projects. And while that may not reflect wholly accurately on scale, it does raise the question of whether HMRC has dramatically underestimated the number of contractors affected – especially when you consider the sheer size of such as the NHS, which has a reported workforce of 1.4million.”