Separate stories published in Daily Mail and Guardian over the weekend suggest that the Government is considering new legislation to force contractors working for a client for over one month back onto the payroll.
What do the stories claim?
Anyone within the contracting industry will be disappointed to read more news stories which misrepresent both the way contractors work, and how they are taxed. But, this is exactly what two leading newspapers have done.
The stories claim that ministers are considering a further clampdown on a ‘loophole exploited by as many as 100,000 people’, which could apparently raise £400m per year for the Treasury.
The Guardian claims that ‘special companies’ are set up to help professionals in media, IT and nursing avoid income tax and NICs.
Of course this is not quite true – there are no ‘special companies’. The term ‘personal service companies’ has been coined to describe normal limited companies which happen to be used by people supplying their own services to clients.
Amusingly, the Daily Mail refers to the limited company structure as an ‘obscure device’, despite over 3 million being active currently.
The paper also claims that directors of these companies can ‘cut their tax to about 20% by offsetting a series of expenses against their earnings.’
Again, this is misleading. Corporation Tax is levied on all company profits – this stands at 20%. Shareholders in such companies then have to pay income tax and NICs (if applicable) on any salaries and dividends they receive from their companies, after Corporation Tax has been accounted for.
Both reports claim that the Government wants to force large numbers of limited company professions back on to the payroll – even by creating new legislation which would oblige a consultant to be paid as an ’employee’ if their contracts last for more than a month
The Mail suggests that HMRC will create an online checklist to help applicants assess whether or not they should be reclassified as staff.
This seems a little unlikely considering that HMRC had to abandon its previous attempt to determine the employment status of contractors via an online test; it was forced to withdraw its IR35 business entity tests in April, after they were deemed to be ‘unfit for purpose’ by almost everyone who came into contact with them.
According to both reports, any potential new rules would apply to contractors working in both the private and public sector.
Strong reaction from contractors’ group
Unsurprisingly, Chris Bryce, chief executive of IPSE, issued a strong statement, in which he says his organisation is seeking urgent clarification from the Government as to whether the proposals described within these news reports have any substance.
Bryce said that such legislation would make freelancing almost impossible, and would “cause untold damage to the flexible economy.”
“This measure was not contained within the Government’s original consultation documents and has not been raised by the Government with stakeholders in its regular IR35 Forum meetings. Springing such a measure on a sector which is already short on confidence could cause significant harm to the economy, which relies on independent professionals for flexibility and innovation.”
Whether these reports are completely false, or have a degree of merit, we’re unlikely to know more until the Chancellor delivers his Autumn Statement on 25th November.
In the meantime, to find out more about forthcoming tax changes which may affect contractors, try our popular article, the four-fold attack on contractors.