Self-employed workers who are paid through companies could be hit by new tax crackdown

On Friday of last week, the Government launched a consultation seeking views on the best way to “tackle non-compliance with the off-payroll working rules in the private sector”. The off-payroll working rules – colloquially known as IR35 – are designed to combat alleged tax avoidance by workers who supply their services to clients via an intermediary, such as a company, but who would otherwise be considered an employee if the intermediary was not used.  Such workers are considered disguised employees and, if caught by IR35, will have to pay higher levels of income tax and national insurance, calculated as if they were employed.  The financial impact of IR35 can be quite significant, reducing a workers net income by up to 25%. The off-payroll working rules were introduced in 2000 but were largely ignored by those at whom they were aimed, their advisers and HMRC alike.  However, seeing a massive black hole in their coffers, Government was forced to reform the IR35 rules, initially insofar as they related to engagements in the public sector.  Since April 2017, HMRC estimates that they have raised an additional £410million of income tax and national insurance due to the reform, but it is difficult to ascertain whether this is as a result of better compliance, or as a result of public bodies de-risking by making blanket assessments which could result in some workers being incorrectly taxed. In last year’s Autumn Budget, the Government announced it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector, so Friday’s launch does not come as a surprise.  This seems like something of a formality however.  There is a certain sense of inevitability that the public sector reform will extend, unchanged, to the private sector, and quite likely from April 2019. The off-payroll working rules are complex – indeed, Friday’s launch came just days after HMRC lost a tribunal hearing on the subject of IR35, quite possibly due to poor understanding of the relevant tests – and each case must be considered on its own merits.  The public sector reform sees the work provider – the public body – as being responsible for determining a worker’s IR35 status and places an onus on the public body to withhold income tax and national insurance where necessary.  If they get it wrong, HMRC’s first recourse to recover lost tax is the public body.  Will this work in the private sector?  Does HMRC have sufficient resources to educate and monitor compliance in the private sector?  Who knows! One thing is clear however.  Anyone providing their services to clients via an intermediary, and indeed those clients receiving the services, must follow this consultation and they must have one eye fixed firmly on their operating practices with a view to working outside IR35…. or end up facing quite a substantial reduction in net income! Take a look at our factsheet on IR35 for more information.