Treating the Self Employed as Employed….
It is interesting that commentators are currently assuming that agencies won’t want to get involved with determining IR35 status for public sector contractors.
This is effectively ignoring the fact that it could be down to passing or failing the “new” IR35 test when we have the on-line tool and agencies, or end clients, have to start using this tool. That said it remains to be seen whether agencies are willing to apply the test on behalf of contractors and be happy to defend their decision, if necessary.
Agencies may instead look to make more use of umbrella companies. Most commentators have assumed that they are unlikely to want to get involved with determining tax status. One thing is certain, the government is determined to address the issue of personal service companies being used to what they perceive as avoiding tax and national insurance.
Why has the public sector being targeted first? I suspect it’s because its caused by the political embarrassment caused by the use of personal service companies by politicians acting as consultants to government departments until it was exposed a few years ago. I believe this was the trigger for the current proposals. Most commentators think the new proposals will be it extended to the private sector and some have predicted this will happen from as soon as April 2018.
From the contractors point of view it could be argued that they the government are effectively lifting the “corporate veil” and treating limited companies as individuals. The limited company status of contractors is potentially going to be ignored for tax purposes. Contractors will be included on the engagers payroll as if they were employed by them using a deemed salary calculation which gives a limited deduction for expenses. The Contractor will then in turn have to seek relief for the personal tax suffered on any salary or dividends he takes from his limited company.
I have yet to see worked examples of how relief will be given for tax suffered within the contractors own companies. What would happen if the salary drawn from their companies doesn’t match up with deemed salary calculations made by the engager? Does that mean that disproportionate amounts of tax could be paid, given that corporation tax will still be due on the company profits? The detailed rules are yet to be formulated about how the new proposals will work in practice.
Clearly this can be seen as the worst of both worlds for contractors – the uncertainty and risk of self- employment with the potentially high tax and national insurance liabilities that higher rate taxpayers face. There is also an additional administrative burden ensuring that they do not suffer unfair double taxation.
Sole traders and partnerships are soon to face digital reporting requirements with more real time accounting requirements reporting and potentially more tax payments on account based on real time information. Again this feels like treating the self- employed as if they were employed.
Isn’t the government supposed to be encouraging a mobile workforce and entrepreneurship? This doesn’t seem consistent with their current policies. This has been pointed out by a number high profile organisation which represent Contractors and the self-employed such as IPSE.
It’s definitely a case of watch this space. Please leave a comment about your views on the new government proposals. You can also follow me for more news about IR35 and digital reporting @rjbradley.