Contractors Taxed as Employees
Contractors everywhere are in shock over the Chancellor’s announcement in his latest budget that most contractors will be taxed as employees.
There was speculation in the newspapers prior to the Budget that the Chancellor would roll out the changes that he introduced in the public sector in April 2017 to the private sector. Many in the public sector are already taxed as employees.
The Chancellor decided to roll it out in April 2020.
So, it is now going to be rolled out in the private sector in April 2020. He announced this in the Budget in October.
HMRC Announcement at IR35 Forum
At a recent IR35 Forum, HMRC said that there is an urgent need to stop contractors in the private sector from avoiding tax.
So, the IR35 changes implemented in the public sector in April 2017 will be rolled out n the private sector in April 2020.
ITContractor.com warned contractors when it happened in he public sector that this might be the case.
Many contractors said that the Government wouldn’t dare roll it out in the private sector.
They said that big business would never allow them to do this. Private sector contractors would never be taxed as employees.
Contractors Working for HMRC
We had information from an agency owner who had contractors working at HMRC.
The owner said that he had a contractor there who told him that he was already working on rolling it out to the private sector.
Even with that, many contractors wouldn’t believe it.
Now it will come to pass.
Budget Leaks on Contractor Issues
The Government is going to put the onus on deciding a contractor’s IR35 status on the client company hiring the contractor.
And punishing them financially if they get it wrong.
It calls these contractors off payroll employees.
There will be no penalty the other way round, i.e. if a contractor is falsely declared to be inside IR35.
Contractors in the Public Sector
So, how will this work out in practice?
Well. let’s look at the outcome after they implemented it in the public sector.
Along with this new ruling on IR35 status, HMRC produced a new online IR35 test.
Despite this having no basis in law, government departments used this as an indicator to show whether contractors are inside IR35 or outside IR35.
Indeed, many Government departments like the NHS and HMRC went even further.
No Longer Use Personal Service Company Contractors
They said that they would no longer hire personal service company contractors.
Indeed, those contractors currently working for those departments had to abandon their personal service companies by April 2017 or face termination of their contracts.
This all comes back to what Prime Minister Theresa May and Chancellor Hammond said earlier in 2017.
They said that it was unfair that those who operated through a personal service company earning £100,000 a year paid less tax than an employee earning £100,000 a year.
Although this is not comparing like with like it is the basis of decisions that they took and will take.
Of course, an employee earning £100,000 a year gets many more benefits as well as a lot more job security than a contractor earning £100,000 a year.
So, any actions that the Government take or will take is to try to rectify what they see as an unfair anomaly.
Public Sector Departments IR35 Choice
When public sector departments wanted to know what they should do they did what they usually do.
They went to the big consultancies and asked them for their advice.
The big IT Consultancies traditionally don’t like contractors.
They see them as rivals for the outsourcing market.
They would much rather companies would pay more than a grand a day for people who were graduates perhaps just six months previously than pay half that for IT contractors of ten years experience or more.
Big Consultancies Advice to Government Departments
The big consultancies told the Government departments that they should take no chances.
Although a contractor who sits the IR35 test may be outside IR35 now, HMRC would likely tinker with the test and the contractor might be inside IR35 later – with the Government department picking up the tax bill.
So, they told the Government departments that they should refuse to take any more personal service company contractors.
So, many departments took that advice.
Private companies also ask the big consultancies for their advice.
IR35 Rules in the Private Sector
So, how will private sector companies react when these new IR35 rules are brought in?
Will they continue as usual letting the contractors decide their own IR35 status and risk getting huge fines if the contractors get it wrong?
Will they make contractors sit the new online IR35 test and use that as the determining factor in contractors’ IR35 status?
It’s worth pointing out here that an agency told us that only half of their contractors who had operated previously using personal service companies passed the IR35 test.
Or will some companies do, as some Government departments did, and take no risk in case they get hit by penalties if they get it wrong, and stop using personal service company contractors?
One expects that it will be a mixture of the 2nd and 3rd options as in the public sector.
Contractors Forced Out of Using Personal Service Companies
So, this will mean that at some companies half of all contractors, who are currently using PSCs, will now not be able to use personal service companies. They will be taxed as employees.
At others, 100% of contractors are no longer able to operate via personal service companies. They will be taxed as employees too.
Which means that somewhere between half and 100% of contractors now using personal service companies will have to abandon them.
Contractors Take Home Income When Taxed as Employees
This will make a huge difference in take home income for contractors.
It will be a very different contracting profession in the future.
What most contractors who couldn’t use their limited companies any more did was to join umbrella companies rather than just pay the IR35 tax.
Operating through an umbrella company is still marginally financially better than paying the IR35 tax.
Many contractors in the public sector found that they were able to keep just 60% of their income as opposed to often more than 80% of it.
Taxed as employees – Huge Difference in Contractors Income
That’s a huge difference. Many locum doctors, for instance, found themselves facing what is effectively a massive pay cut.
Its implementation in the public sector has hit the NHS hard with many locum doctors and agency nurses leaving the NHS and so they are having trouble in recruiting consultants.
It also has caused massive delays in IT projects including at HMRC itself who lost a whole load of IT contractors.
It has also seen the fees that the NHS has to pay for locums soaring by 6.3% in just the 6 months after implementation. That compares to less than a 1% increase across all sectors since implementation.
Prime Minister and Chancellor – Taxed as Employees
However, the Prime Minister and Chancellor consider themselves to be righting a great wrong.
They believe that it is grossly unfair that a contractor earning £100,000 a year should pay less tax than an employee earning £100,000 a year.
And there has been no one to put them right on this.
Contractors Lobbying Group
If contractors and freelancers had a decent lobbying group representing them, a lot of these things would just not happen. They would not suffer the threat of taxation at employees levels.
They would show the Prime Minister and Chancellor the difference between a freelancer earning £100,000 a year and an employee earning £100,000 a year.
You can explain this by the different level of benefits and some of it is risk premium.
So, what are freelancers representatives IPSE doing about this?
Well, they did what they usually do.
They have rushed out a press release condemning it.
This appears to substitute for action on the matter.
We have seen, in the past, how much notice that the Government takes of these IPSE missives..
IPSE’s National Insurance Change Claim
They tried to claim credit last year for the Government changing their mind on a National Insurance increase for contractors earlier in 2017 when it was a backbench revolt which got it changed as there had been a specific promise in their manifesto not to do so.
However, this shows that the Government can change their minds and stop legislation.
But time is short.
Contractors Opportunity to Change Legislation
So, contractors may just have an opportunity to change things by causing an uproar over it.
However, time is short.
So, what can private sector contractors do to try to stop this measure before it sees the light of day?
They could contact their local MPS and they could contribute to any effort that contractors group IPSE are taking (if any).
How Can Contractors Resist This Government IR35 Measure?
They could also let other contractors know what is likely to happen by Liking, Commenting on, or better still, Sharing this article on LinkedIn or other social media or simply by forwarding the article via email.
Time is very, very short.
When the Government brings this in, based on a lack of knowledge of the profession, this could change contracting forever. Do what you can.
This contractor has taken action by writing to his MP – Contractor IR35 Budget Tax Shock. Contractor Demands Answers from MP
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