Thousands of expat contractors could face a tax crackdown if rumours that Chancellor George Osborne is about to scrap controversial IR35 rules prove true.
Government sources have leaked details of a plan to stop contractors claiming they are self-employed to avoid tax due to be announced in this month’s Autumn Statement
Many contractors work as director employees of personal service companies. They draw low salaries and top up their earnings with dividends to avoid national insurance contributions.
Osborne has floated a proposal to stop this by making employers put any contractors who work for them for more than a month on their payroll. Under the plan, contractors will still pay the same amount of income tax, but will have to pay national insurance as well.
The Treasury has estimated the measure will raise an extra £400 million in revenues every year.
IR35 loopholes
If the rumour is correct, thousands of contractors working for their own companies will be hit.
The idea is not new – the government has clamped down on public bodies employing consultants and contractors with public service companies over the past two years.
The practice came to light when BBC celebrities were allegedly discovered avoiding tax on their earnings by working for their own companies.
The proposal would also rid HM Revenue & Customs (HMRC) and the government of the controversial IR35 rules devised by former Labour chancellor Gordon Brown.
The complicated rules are full of loopholes and ambiguities that HMRC has battled to close through the courts over the past decade without much success.
The rules revolve around an employment status test that is difficult to interpret and prove.
Loss of expenses
If contractors are paid as employees, they also lose thousands of pounds of tax-relieved benefits, such as offsetting the cost of travel, business consumables and equipment, such as computers and mobile phones.
The plans are still under wraps and the leak has not received any public confirmation from The Treasury or Osborne.
The Guardian newspaper quotes a ‘government source’ saying: “The tax system has to be fair for everyone and it’s not fair that some people are employed and pay their taxes when the person sitting next to them does the same job for their own company and pays less tax.”
The source also indicated the new rules would have some exceptions, such as builders working at a client’s home for more than a month and consultants with more than one client.
What is often forgotten is that contactors operating as professional service companies although sometimes doing a similar job to their permanent counterparts, are brought in to provide specific expert technical expertise in an extremely quick and flexible way for the companies requiring such expertise. There is no real difference between what these experts do as opposed to a plumber, electrician or other services company so why treat them differently.