IR35 Budget Proposal
The Conservative Government has leaked a 2017 IR35 Budget Proposal.
After April 2018 most UK contractors will be inside IR35 and will pay the same tax as permanent employees.
This is to fix a grave injustice that the Prime Minister and the Chancellor see.
Earlier this year they both said that “It is grossly unfair that a self employed person earning £100,000 pays less tax than a permanent employee earning £100,000”.
That was just before setting out to fix this gross injustice with their own contractors in the public sector.
Influenced by Big Consultancies
This idea was, no doubt implanted in Government’s minds by the myriad of people from the big consultancies that they get in to advise them.
The big consultancies have long wished that they could replace every contractor in the market with consultants of their own (often very junior) for double the price.
This change from the Government shifted the onus on deciding the contractor’s IR35 status from the contractor to whoever hires him or her.
There would also be penalties for any Government department who got it wrong. They would have to pay the tax themselves.
This was very clever (or sneaky) by the Chancellor and Prime Minister.
They know how risk averse Government departments are.
New Online IR35 Employment Status Test from HMRC
At thh same time HMRC came up with a new online Employment Status Test which purported to show if contractors are inside IR35 or outside IR35.
Of course, this was just HMRC’s opinion as to whether a contractor is inside IR35 or not.
And you have to say that previous experiences shows that they are a bit biased in this matter.
IR35 Budget Proposal – Most Contractors Inside IR35
One agency whose contractors sat the test said that 60% of their contractors who were currently operating via limited companies, were now considered to be inside IR35 after sitting the test.
Some public sector departments, especially Trusts in the NHS, and HMRC themselves, decided that they would no longer use contractors operating through personal service companies.
Those locums, agency nurses or IT Contractors who they already had one their books were told that they had to pay the full whack of tax.
According to the new rules, whoever pays the contractors is responsible for deducting PAYE and National Insurance.
Recruitment Agencies or Umbrella Companies to Deduct IR35 Tax
In most cases this was the recruitment agencies.
However, many agencies don’t have payroll systems.
So, what happened in most cases of those freelancers found by the test to be inisde IR35 was that they joined umbrella companies.
Those who worked for Government departments who no longer took personal service company contractors joined umbrella companies too.
There was an umbrella company feeding frenzy in March 2017.
Locum Doctors and Agency Nurses
Many locum doctors and IT contractor told us that whereas previously they were paying around 20% or less of their income on tax whiles using personal service companies, they were now paying 40% or more of their income via PAYE and NI or through their umbrella company.
This was double the tax and NI that they paid previously.
It is also the equivalent of a massive 25% pay cut.
IR35 Changes in Private Sector
Now, the Government budget leaks suggest that they want to roll these new IR35 rules out in the private sector too.
If they bring in this new IR35 Budget Proposal, Prime Minister and Chancellor will have their dream of forcing most contractors who earn £100,000 a year to pay exactly the same tax as employees earning £100,000 a year.
Many contractors will get out of contracting as freelancing would no longer be as worthwhile financially as it was before.
The Government will lose its flexible workforce.
And the big consultancies will step in charging over a grand a day for junior developers not long out of university.
How this will benefit British industry is not clear.
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