Workers who are defined as companies will pay more tax

UP to two million contract workers who are paid as though they are companies are facing a clampdown.

The taxman reckons it is missing out on up to £700million a year from private sector employers paying workers in this way – and the figure could rise to £1.2billion by 2023.

The measures are designed to target socalled ‘false employees’ who are paid via intermediary companies while being treated in the same way as employees who are on payroll. The Treasury said this has become increasingly common in construction, retail, IT, media and professional services.

The Government has already made public sector employers responsible for carrying out these checks following reforms in 2017, which raised an extra £550million in income tax and national insurance during their first year.

From April 6, 2020, medium and large companies in the private sector will be responsible for assessing their workers employment status to ensure they pay the right level of tax. The Treasury estimates that bringing private sector employers under so-called ‘IR35’ rules will raise an extra £1.2billion in 2020/21 and up to £700million a year thereafter. An employer would currently save £5,042 a year in NI contributions if paying a contractor £50,000 a year through a limited company instead of treating them as an employee and putting them on payroll.

After taking into account the employee’s tax and NI, the overall saving would be £6,030 leaving the employee with £39,982 a year instead of £33,952, according to calculations by Deloitte.

The number of small companies with one or two directors jumped from around 250,000 in 2000 to over a million in 2015. While many of these will be legitimate businesses, the Government said it wants to bring an end to a situation where two people doing the same job can end up paying very different levels of income tax and NI.

The Treasury confirmed that the smallest 1.5million businesses will not be caught by the new regime.

Philip Hammond said: ‘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.’

But Chris Bryce, chief executive of the Association of Independent Professionals and the self-employed, said: ‘The off-payroll rules are so complex and crude that genuinely selfemployed people will be swept up by the Government’s smash-and-grab mentality and in many cases taxed out of operation.

‘This will have a chilling effect on entrepreneurialism in the UK – if you’re thinking about striking out on your own, as a white van man or a one-woman band, you’ll always be looking over your shoulder wondering when the Government will be coming after you’.

Mark Groom, employment tax partner at Deloitte, said: ‘The Government has listened to the concerns of private sector businesses that bringing in IR35 in April 2019 would have been too soon.

‘Given the scale and complexity of the private sector, the extra time will be welcomed. But there’s still a lot to do, and business should start preparing now, to avoid being caught out closer to April 2020’.