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Is IR35 going to be changed in the 2016 Budget?

IR35 looks set for a review that could make clients responsible for its enforcement and change the basis for the existing tests of employment to an evaluation of supervision, direction or control (SDC).

This is according to a widely reported pre-Budget leak that also claims 90% of contractors are ignoring the rules and the changes will net the Exchequer an extra £400m in tax.

“Budget to tackle ‘off the books’ dodge used by civil servants and media stars,” writes the Mail on Sunday’s Glen Owen, whereas the Press Association’s political correspondent Sam Lister was more explicit on saying: “New guidelines will also be introduced to make it clearer when employment taxes should be paid.”

But ContractorCalculator CEO Dave Chaplin believes any new measures could impact negatively on all small businesses: “There is no such thing as a personal service company (PSC) in law, and no-one has been able to define one. They are just one person companies, which are no different to other one person companies such as electricians, plumbers, and so on. Any new legislation will therefore apply to all businesses – every single one.”

“We are going to put a stop to it”

“Personal service companies can be legitimate,” one government source told reporters, “but we estimate that 90% of people who should comply with the rules, don't. Some may not understand the rules but it's clear others are using them as a way to minimise their tax bills.

“You have situations where someone working in a public body pays thousands of pounds less in tax than someone doing exactly the same job alongside them who's taxed as an employee. That can't be fair – either on the taxpayer or their fellow workers. We are going to put a stop to it.”

Chaplin highlights that the claim that 90% of contractors are flouting the IR35 rules is nonsense: “When the Treasury reviewed the tax status of all public sector contractors back in March 2014, it found that 94% of all off-payroll contracts were ‘legitimate’. So where the Government has come up with the 90% non-compliance figure is anyone’s guess.”

Civil service factions infighting - HMRC does not believe in changing IR35

Furthermore, Chaplin is convinced that HMRC has not signed-up to the proposed changes and this latest leak, like the one before the Autumn statement in November 2015, highlights rifts between the Treasury and HMRC.

“HMRC told me that it does not view passing IR35 compliance onto the client community as an acceptable burden on business. It also signalled to the IR35 Forum that there are no plans to change IR35 until ‘at least 2017’.

“Our sources confirm that this is still what HMRC’s policy team believes, so someone in the Treasury is again ‘kite flying’ another policy idea to evaluate the response, just like in November last year, although this time is it dressed up as tackling tax avoidance.”

Where does the £400m in extra tax come from?

Chaplin is also bemused at the latest claim that enforcing IR35 will generate an additional £400m for the Exchequer: “The dividend tax change coming into force from April 2016 aligns the tax paid by the self-employed with those working via limited companies.

“This change has already happened and the only ‘tax loss’ suffered by the Exchequer is employers’ National Insurance Contributions (NICs). And that’s nothing like the £400m that has been proposed in the leaks.”

Chaplin also notes that the Office of Tax Simplification (OTS) has proposed that employers’ NICs are changed into a single payroll tax based on the total payroll, which will further dilute any disparity between NICs paid by contractors.

Contractors should beware of nasty shocks buried in the Budget small print

According to the Guardian’s Larry Elliott and Anushka Asthana, “the chancellor fuelled speculation that some nasty shocks were in store in his eighth budget”, adding that the Budget is likely to include measures that “crack down on a tax avoidance loophole that allows television stars to be paid ‘off the books’.”

Chaplin’s view is that the Chancellor has boxed himself into a corner with his debt reduction targets and restrictions on increasing headline taxation via income tax, NICs and VAT, so contractors could be looking at some quite creative stealth tax rises.

“Following the dividend tax changes announced in the Summer 2015 Budget that no one could have predicted, anything is possible. Alongside tinkering with IR35 to make clients responsible for compliance and introducing SDC as the main test, we could see other measures.

“Will public sector contractors be forced onto the payroll after a set period? Will clients be forced to pay a surcharge on off-payroll workers? Could the settlements legislation be revised to prevent contractors from income splitting?

Osborne, the best Labour Chancellor of the 21st century

Chaplin continues: “The Tories – the so-called party for business – have introduced a huge amount of additional legislation on the contracting and small business community, including the dividend tax changes.

“This is not what Conservative voters signed-up for when voting in a Conservative Government in May 2015 – far from it. The Conservatives are supposed to be light touch when it comes to legislation and regulations. Chancellor George Osborne is turning out to be one of the best Labour Chancellors this century!”

Chaplin concludes: “It looks like there will be no let up on the pressure on contractors and freelancers, despite the Government’s claims to support entrepreneurship. But let’s hope that this latest leak is once again a kite-flying exercise that will come to nothing.”

Published: 15 March 2016

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