Employers who wrongly classify the self-employed as being outside IR35 will have to cover their PAYE and National Insurance, says HMRC, meaning tens of thousands of freelancers could avoid paying any tax at all as reported by a website offering advice for small businesses.
Thousands of freelancers could duck out of having to pay any tax if their employer wrongly categorises them as being outside of IR35 tax reforms. HM Revenue & Customs extended its IR35 tax changes last April, hoping to bring 180,000 private-sector freelancers, mostly IT contractors, within pay-as-you-earn tax (PAYE) and National Insurance.
The tax authority’s gripe was that self-employed contractors using limited companies – and just paying tax on dividends – for all intents and purposes enjoyed the security of full-time employment, while not paying what it saw as their fair share of tax.
However, employers whose decision to classify freelancers as still being outside IR35 since last April could face having to shoulder all of their PAYE and National Insurance contributions, if HMRC successfully challenges them.
This is because when paying freelancers, it is assumed that payments are net of income tax and National Insurance. So employers could face tax bills running into millions – and make them more risk averse than ever to hiring contractors outside of IR35.
This situation has already cropped up in the public sector, where public bodies have had to pay out £263m to HMRC in taxes in 2020-21.
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