Chancellor Phillip Hammond has extended the controversial IR35 tax rules to private businesses to make contractors pay the same taxes as all other workers.
If this is a good or bad policy depend on your point of view.
Contractors feel hard done by because they will have to cough up more tax, but many argue they have simply dodged this bullet for too long by exploiting loopholes in tax laws.
The new rules that apply from April 2020 mean companies employing contractors will have to decide if they are full-time staff or self-employed workers.
The decision involves considering factors like can the contractor send a substitute worker to do their job, who controls where and when they work and if they a financial risk is involved in their activities.
The rule of thumb is if they work for one company and that company pulls the strings of their contract, they re an off-payroll employee and IR35 applies – and IR35 applies to expats working for UK companies as much as anyone else.
The company must then deduct tax and national insurance from their pay as if they were a direct employee. Employers making the wrong decision face hefty penalties, so they are likely to err on the side of caution and regard contractors as employees.
If not, the contractor invoice is paid in full and the contractor pays tax as a self-employed worker. As they typically work for their own company as a director and shareholder, they extract a low salary below the level for paying national insurance and dividends that are tax effective.
Chris Bryce, chief executive at the Association of Independent Professionals and the Self-Employed (IPSE) said the changes could force some businesses to close.
“It is a short-term tax grab that will do lasting damage to the economy by taxing out of existence the smallest and most agile businesses,” he commented.
“These are the very businesses the government and large corporations will need to call upon to provide the specialist skills to navigate our way through Brexit.”
In his Budget 2018 speech, Hammond briefly explained his reasoning for extending IR35 rules.
“The off payroll working rules – known as IR35 – are designed to ensure fairness so that individuals working side by side in a similar role for the same employer pay the same employment taxes.
“Last year, we changed the way these rules are enforced in the public sector. But widespread non-compliance also exists in the private sector, so following our consultation, we will now apply the same changes to private sector organisations as well.”
IR35 has long been a bone of contention between HM Revenue & Customs and contractors that has triggered many court cases, but the time of plenty for contractors has come to an end.