Tax Tax Advice

Government expect £2.9bn boost from IR35 clampdown

30 Jun 2019

Hundreds of thousands of private-sector contractors face higher tax and National Insurance (NI) bills from April 2020 following the Budget released on Monday, October 29th.

The Chancellor announced tighter tax rules for those working in the public sector will be extended to those working for private firms. The rules, known as IR35, are designed to hit those deemed by HM Revenue and Customs (HMRC) to be employees.

Among those affected will be IT contractors, engineers and consultants, with the crackdown being the biggest revenue-raising measure in this year's Budget.

Critics accused the Chancellor of hurting thousands of people who are self-employed, and burdening businesses too. However, the Treasury insisted that the reforms would not affect anyone who was genuinely self-employed.

As a small business accountant, we have a wealth of experience in working with self-employed and using our in-depth knowledge of IR35 to help clients navigate HMRC’s strict rules.

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What are the new IR35 rules?

For IR35 to apply, you have to work through your own company for another business.

If the way you work is similar to an employee of that business, you should pay income tax, and National Insurance (NI) at the 12% rate.

Up to now many contractors in personal service companies have been paying less tax and NI.

Under the new rules, from April 2020 larger businesses - like engineering companies and legal firms - will take on responsibility for deciding which contractors will need to pay more tax and NI.

If someone is deemed to be an employee, the firm using the contractor will also have to pay NI for the first time.

Who is self-employed?

An example provided by the Treasury involves a website designer who mainly works at home. They use their own equipment and work for other clients as well. They faces a contractual penalty if they doesn't finish the work on time.

As they meet the test for self-employment, they won't be caught by the new rules.

Who is an employee?

The Treasury says a number of different factors define whether a worker should be deemed an employee.

Things to be taken into account may include:

  • hours of work

  • whether the firm controls what they do and how they do it

  • whether the firm provides equipment

  • overtime payments

If classified as an employee for tax purposes, they would have to pay income tax, and NI at 12% on the money paid for their work. However they may not have other employee rights, like maternity leave.

How much money will the government make from the rule change?

The Treasury estimates that the changes will bring in an extra £2.9bn by 2024.

When similar changes were brought in to the public sector last year, HMRC raised an extra £550m in tax and NI.

What has been the reaction?

The Association of Independent Professionals and the Self-Employed (IPSE) accused the chancellor of putting the self-employed in a "holding pattern of despair."

"The government's smash-and-grab mentality will therefore punish the overwhelming majority of genuinely self-employed people, heap a massive administrative burden onto businesses at a time of Brexit uncertainty, and also undermine one of the UK's most dynamic and productive sectors," said Chris Bryce, IPSE's chief executive, in a statement.

Although now delayed until April 2020, the Chancellor's announcement that IR35 will be extended to the private sector will most likely send shockwaves through the self-employed community, leaving hundreds of thousands with the worry that they will need to pay much more tax on their earnings.