In May 2018, the Government launched its long-awaited consultation into off-payroll working (IR35) in the private sector. The consultation, which runs until the 10th August 2018, puts the responsibility on companies to determine whether freelancers and contractors that they hire are genuinely self-employed.
This crackdown is intended to stop the avoidance of billions of pounds of tax. Read on to learn more about the latest proposed IR35 changes and what it could mean for you and your business.
Recent IR35 changes explained
Anti-tax avoidance rules in place since 2000, known as IR35, are supposed to ensure that anyone effectively doing the work of an employee, pays broadly the same amount of tax.
In April 2017, the IR35 rules were contentiously amended for public sector engagements, making employers or the recruitment agency for the first time responsible for assessing the IR35 status of limited company contractors.
According to the Treasury, this change resulted in 58,000 extra individuals paying income tax and national insurance contributions in any given month, with an additional £410m of revenue collected in the first 10 months.
This latest Treasury consultation could mean lower take-home pay for tens of thousands of freelancers and contractors as well as those who sell their services through recruitment agencies such as chambermaids.
The reasons behind the IR35 crackdown
The Government’s crackdown on IR35 non-compliance is present throughout this latest consultation. It states several times that the HMRC estimates “only around 10% of people who should comply with the off-payroll working rules do so”. The consultation also states that the HMRC estimates the cost of non-compliance in the private sector to currently be £700 million, with a projected increase to £1.2 billion a year by 2022/23.
Under the preferred reform option in the Treasury’s consultation, the company or recruitment agency would need to determine whether the freelancer or contractor hired were in practice being treated as employees. If so, they would be liable for deducting the correct tax. This change would be similar to those introduced in April 2017 for temporary workers in the public sector.
Overall, the consultation sets out a very stark picture of what the Treasury refers to as an “endemic non-compliance for off-payroll engagements in the private sector”, which is in need of reform.
What freelancers & contractors should be aware of for future tax assessments
While it’s not clear how soon IR35 changes would be implemented, the consultation which dealt with the public-sector reforms came out at a similar point in the year (May 2016) with a similar closing date (August 2016). Those changes then came into force the following April (2017).
A compliant position now may well not remain so under new rules that could be with us in a very short space of time. The impact of the proposed changes to IR35 by the Treasury should therefore not be underestimated as they would arguably be the most significant changes to the operation of employment taxes for many years.
Get in touch with us today to get specialist advice from our tax accountants in Salford (Media City) or Manchester City Centre to find out how to avoid IR35, when does IR35 apply or to discuss the latest IR35 changes.