Philip Hammond is expected to announce a further crackdown on people claiming self-employed status in the Budget, targeting people who’ve set up private companies in order to pay lower levels of national insurance. Contributor Nigel Morris, Tax Director – MHA MacIntyre Hudson.
Reform of the IR35 rules that govern self-employment status is seen as a less politically controversial way to raise money for the Treasury, in the absence of Parliamentary support for an increase in National Insurance Contributions (NIC) from the self-employed.
HM Revenue & Customs (HMRC) estimates a third of people working through their own company should be taxed as employees, yet only 10% currently pay the right tax, costing Treasury £700m in 2017/18.
Last year the government moved responsibility for deciding the employment status of contractors to the public sector from the contractor to the client. HMRC commissioned research concluded that roughly 58,000 more public sector workers paid tax via Pay As You Earn (PAYE) between April 2017 and February 2018 as a result, generating an additional £410m in tax receipts.
HMRC has consulted on implementing similar changes to the private sector, effective April 2019, but it’s unlikely businesses will be ready. We’d like to see the Chancellor use any Brexit ‘deal dividend’ to support the delay of implementation until at least April 2020.
In addition, we’d urge HMRC and the Treasury to revisit the proposed arrangements and potential alternatives it ruled out in its consultation. Some of the approaches dismissed have real merit and there’s a lot that can be learnt from the public sector roll out. All options that alleviate the burden on businesses and produce a fair result when comparing tax and NIC for the self-employed versus employees should be considered.
The Government should look closely at how accurate the results of its Check Employment Status for Tax (CEST) tool are, how proposed changes impact the availability of required skills for employers and ‘arrangements’ emerging to avoid IR35, and the additional areas of avoidance this has created.
In the meantime, we encourage employers to review their use of off-payroll workers, especially consultants and non-executives, to identify if they are genuinely self-employed or likely to be caught by the proposed IR35 changes. An early intervention to review, categorise and plan how to manage any potential changes will help employers prepare for what unfortunately looks like the inevitable.