The current consultation into extending the so-called ‘off-payroll’ (IR35) rules to the private sector is just the latest in a series of targeted tax strikes against professional contractors which goes back almost two decades.
IR35 – the biggest tax attack of all
Of course, we are all familiar with IR35 itself – the Intermediaries Legislation, which became law in 2000. This measure was implemented to clampdown on what was seen as an epidemic of ‘disguised employment’ – whereby employees would leave their jobs (mainly in IT), and return to perform similar employee-type roles – but this time working via their own limited companies.
For those caught, the financial cost of IR35 is significant and will cost those caught many thousands in extra tax each year. See our IR35 tax calculator for examples.
Since 2000, IR35 has been tinkered with several times, to make it more potent – as ‘IR35 non-compliance’ is seen by the taxman as widespread.
The most dramatic change came in April 2017, when the off-payroll rules were imposed upon public sector employees. For the first time – as a result of a chaotic implementation, clients were responsible for determining the employment status of contractors, rather than the contractors themselves. In many cases, this has resulted in blanket in-IR35 determinations, meaning that contractors legitimately operating outside IR35 have been forced onto the payroll… without receiving any of the benefits associated with employment.
And despite widespread opposition, the Government appears determined to extend the off-payroll rules to the private sector. A consultation was launched last month.
Pay more tax, but receive no perks
However, whilst IR35 has dominated all of the headlines since 2000, in the meantime, successive governments have been squeezing limited company owners in many other ways. Most contractors are not caught by IR35, but have still had been stripped of their eligibility to claim a number of business tax allowances… or simply been forced to accommodate very large tax increases – particularly the dividend tax hike in April 2016.
These tax hikes have not caused an uproar in the press, because there’s no public sympathy for professional workers. And all along, limited company owners have to pay for the ‘perks’ traditional employees take for granted.
The April 2016 dividend tax hike
In April 2016, the dividend tax system was completely overhauled. Gone was the old system of tax credits, and in its place, a series of fixed tax rates which correlate to the prevailing tax bands. Make no mistake, this was a huge tax hike on the self-employed. A typical contractor now pays £3,000 or more each year as a result. Our article which covers the hike remains our most-read of all time.
In order to soften the blow, the Government provided a so-called ‘dividend allowance’, which was a nil rate band on the first £5,000 of dividend income. However, this was clearly too generous, and the allowance was reduced to £2,000 in April 2018 – just two years later.
Flat Rate VAT restriction
From April 2017, companies which incur low annual expenses (‘limited cost traders’) and use the Flat Rate VAT scheme (FRS) have been forced to pay higher rates of VAT, which has made using the scheme virtually pointless for many contractors.
Again, the Government believes that many small firms have been abusing the system, and so the changes “will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended.”
This restriction has resulted in a £2,000 tax increase for a ‘limited cost trader’ company on the FRS turning over £100,000 per year.
Employment Allowance ineligibility
To encourage employment by smaller businesses, in 2014 the Coalition Government created a new incentive which refunded businesses up to £2,000 (£3,000 from 2016) each year in Employers’ National Insurance Contributions. However, once again, limited company owners were seen to be overly profiting from this pro-business measure, and most contractors were caught by new eligibility rules which took effect from April 2016.
As a result, your company can only claim the EA if your company is not caught by IR35, you are not a sole director (without other employees), and if you do have other employees, at least one other person must earn £8,424 per year in order to qualify.
What’s next?
The tax authorities appear to be blinkered when it comes to the relative taxation of ’employees’ and the ‘self-employed’. On one hand, surely it is the duty of governments to encourage entrepreneurship with tax incentives, but on the other hand, they have a duty to tax all types of worker in a fair way.
Unfortunately, over the past two decades, unable to cope with the changing landscape of employment, governments seem keener than ever to enforce a tax burden on limited company owners to match that of normal employees… or even worse.
Not only do the measures mentioned above target the self-employed indiscriminately, but they also take no account whatsoever of the ongoing costs professional contractors (and other company owners) have to absorb, the lack of any employment rights and benefits, or the perilous nature of self-employment itself.
Will the current Government see sense once the private sector off-payroll consultation ends?
Further tax strikes…
- Public sector contractors caught by IR35 are no longer be able to claim the ‘5% allowance’ for administration expenses (April 2017 onwards).
- Managed Service Company (MSC) rules were put in place in April 2007 which outlawed the use of ‘composite companies’, which were used by a number of contractors prior to this date.
- Tax relief on travel and subsistence expenses can no longer be claimed by umbrella company contractors who are ‘supervised, directed and controlled’ by their client (April 2016 onwards).
- From 2004 onwards, HMRC started to enforce the Settlements Legislation to challenge ‘income shifting’ between spouses. However, since 2009, the decision to formalise such legislation has been kept ‘under review’ following its defeat in the Arctic Systems case.
- Extensive retrospective taxation measures, including the forthcoming 2019 Loan Charge – which means HMRC can recover unpaid tax from individuals who have used schemes involving loans since 6th April 1999.
