Last week’s budget announcement that the off-payroll rules will be extended to the private sector in April 2020 came as unwelcome news for contractors. Despite widespread criticism from financial experts and industry commentators, the government appears determined to forge ahead with the planned extension to IR35 legislation. Here at Umbrella Exchange, we acknowledge the 2020 reprieve as a positive move after an unsettling year for contractors. In the lead up to Brexit, the government will need to take stock of the problems with the new legislation or risk alienating one of Britain’s most productive and agile sectors. We take a look at the developments to date.
Introduced last year, changes to the tax rules known as IR35 are aimed at contractors, who would otherwise be classed as employees, working through limited companies for the purpose of paying lower taxes. The government believes that many contractors should be reclassified as employees, with non-compliancy reportedly costing the exchequer £1.3bn a year in lost tax revenue. In a bid to address this loss, Chancellor Philip Hammond made public sector authorities responsible for checking the contractor’s employment status and deducting the correct taxes; this will also apply to private sector firms with more than 250 employees from 2020.
While the government says that its aim is to establish a ‘fairer tax system,’ there’s widespread concern that the government continues to fund some of the giveaways in other areas at the contractors’ expense. Unlike employees, contractors work without the security of employment benefits or a guaranteed monthly wage packet. While HMRC maintains that ‘the reforms will not affect anyone who is genuinely self-employed,’ this isn’t supported by the upheaval caused by off-payroll reforms in the public sector, or by the vast majority of recent IR35 tax tribunals where HMRCs decision was overturned.
The government’s oversimplified interpretation of employment law, as demonstrated by their highly criticised self-assessment tool, is often confusing for contractors attempting to navigate their way through the new legislation. Instead of providing genuine guidance, HMRC and CEST have often provided highly selective or insubstantial interpretations of IR35’s key determinants (substitution, obligation and control), leading many to conclude that HMRC sees independent workers as an easy target for taxation.
The decision to extend IR35, along with the governments U-turn on abolishing class 2 NICs for the self-employed, does little to acknowledge the immense value that independent workers bring to the economy. This was especially noticeable given the pro-enterprise nature of the autumn budget, which sought to establish the right conditions for business growth and investment in the lead up to Britain’s withdrawal from the EU. Many have criticised the decision as short sighted, with Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), commenting that this flexible and agile sector represents: “the very businesses that the government and large corporations will need to call upon to provide the specialist skills to navigate our way through Brexit.
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