Treasury Clampdown Could See Self-Employed Face Higher Taxes

Following plans announced by the government, private sector contractors could face higher tax bills. The Treasury is targeting contractors who use personal service companies to sell their services, enabling the freelancer to avoid paying income tax and NI. The employer also avoids paying NICs.

HMRC says that many of these freelancers effectively work as employees and would be paying higher tax if employed directly by the client.

Reforms extended to contractors working for private companies

In April last year, HMRC ruled that freelancers working for public sector bodies through a personal service company would have their taxes taken at source, before their fees were paid. The government has now launched a consultation that sets out plans to extend these reforms to contractors working for private companies.

Financial Secretary to the Treasury Mel Stride commented:

“It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy. But it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services. That’s why we’re consulting carefully and welcome a wide range of opinions and evidence on how to tackle non-compliance.”

However, contractors argue that the public sector roll-out has been plagued with issues. So-called “blanket rulings”, where an organisation decides all its contractors will fall inside IR35, and pay more tax, have been a particular target.

Government tool CEST is criticised

Criticism has also been levelled at the government’s online tool for checking eligibility – called CEST – with contractors arguing it gives inconsistent and incomplete results.

Seb Maley, of Qdos Contractor, a consultancy, said the extension of the rules to the private sector was “short-sighted.”

He added: “Blanket determinations are still being made regularly in the public sector despite changes being enforced well over a year ago. But we should be prepared for anything.”

A consultation document compiled by the Treasury states that research has shown that the reforms have not led to a recruitment crisis or higher rates for contractors. It also defends CEST, saying it gives an answer in 85% of cases and rulings are split roughly 60% to 40% between self-employed and employed.

Any changes as a result of the consultation would likely come into force following the Budget in November this year.

The Government believes that less than 10% of those who should have been within IR35 before the rule change were complying.

Clampdown on tax avoidance could see companies hiring contractors more risk-averse

Helen Miller, associate director at the Institute for Fiscal Studies, said a clampdown on tax avoidance would make companies hiring contractors more risk-averse, but this could mean that some people who genuinely behaved as freelancers were wrongly classified as employees.

She added that if the Treasury’s concern was the loss of revenue, it should instead address the tax breaks for self-employment that were not justified by differences in benefits entitlements, and cost the exchequer £11bn each year, she added.

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