Chancellor Phillip Hammond is ready to crack down on self-employed expats who flout tax and national insurance rules.
He has reportedly ordered the Treasury to draft a new set of rules governing contractors who work for their own private companies in a bid to stem alleged tax avoidance.
Many expats work for their own UK limited company and take posts overseas.
The company is subject to UK tax laws.
By invoicing their fees through the company, the self-employed can act as directors and shareholders. This allows them to draw low salaries below the income tax and national insurance thresholds and to top up their earnings with dividends.
New rules for contractors
Although they pay income tax on most of the dividends, this payments are exempt from national insurance.
The Treasury reckons contractors avoid around £1.4 billion in national insurance every year in this way, but workers claiming to be self-employed are really employees who should pay national insurance in full on their salaries.
Recently, the government ordered public bodies to put self-employed contractors who could not prove they were not employees on their payrolls so they paid more tax and national insurance.
Now, Hammond seems ready to apply the same rules to private companies.
The rules are administered by HM Revenue & Customs under their IR35 scheme.
Riddled with loopholes
IR35 has been in place for more than a decade and has always been riddled with loopholes and controversial.
“The Treasury’s claim that it is losing money is based on an ideological flaw and fails to acknowledge the ‘freelance premium’ that individuals charge for their services, compared to what they earn when they are in full-time employment,” said David Chaplin, chief executive of Contractor Calculator which gives advice to self-employed workers.
“That fact alone should blow IR35 out of the water, yet HMRC maintains that individuals are avoiding tax.
“This isn’t true. HMRC’s own calculations demonstrate that 84% of the perceived tax loss where an individual is engaged via a personal service company results from the hiring organisation not having to pay employer’s national insurance.
“Despite this, HMRC continues to suggest that flexible workers are responsible for this perceived shortfall.”
Budget 2018 is on October 29.