Self-employed still ‘over-taxed’
Some employers are wrongly classing – and taxing – contractors as staff, reports Sam Meadows
Tax experts and the selfemployed have called for clarity on a quirk of the tax system that means contractors hired by public sector organisations can be taxed as employees without being granted full employment rights. Something as basic as having a company ID badge could mean an outside contractor falls foul of the little-known legislation, known as IR35, and is taxed as an employee – despite not receiving holiday, sick pay or other employee benefits. The Government has dropped plans first outlined in the Budget to raise NI contributions for the self-employed.
But IR35 rules mean many are still losing out to the tune of thousands of pounds. Before April, the onus for determining IR35 status fell on the contractor, but changes now mean the responsibility lies with the hirer. This has resulted in more organisations – public sector ones in particular – being unwilling to classify workers as external contractors under IR35 rules, for fear of being found at fault by HMRC.
HMRC insists workers are only being required to pay the tax due. But accountants say that the grey area lies between tax law, which only classifies people as employees or nonemployees, and employment law, which has different levels of rights.
Mike Gibson, a consultant who advises local authorities on cost reduction, is fundraising, via crowdfunding, to launch a court challenge of the law.
“Contractors who fall inside IR35 are deemed to be employees and are taxed as such, but they don’t get any of the rights and benefits,” said Mr Gibson, 54, who lives in Hoddesdon in Hertfordshire.
“I think all of us who are responsible contractors recognise there is a value and a place for IR35, but we feel the line is drawn in the wrong place.”
The IR35 rules were originally put in place in 1999 to try to curb the practice of contractors who avoided paying their dues by drawing a tax-free salary from a company structure which they set up for that specific purpose. Most experts agree that there was some abuse. But they also say the current situation is at best unclear.
Anita Monteith, a policy manager at the Institute of Chartered Accountants, said: “There were a number of people at the BBC, for example, who were being paid as contractors and who shouldn’t have been. That’s partly why they targeted the public sector.” She added that, while the policy was necessary, what is needed is greater clarity on the matter.
A review of the so-called “gig economy” was published this week, but has not addressed the IR35 issue. Ms Monteith said her trade body had visited Mr Taylor to recommend his review takes IR35 into account, but he addressed employment law rather than tax law.
According to HMRC, an individual earning £100,000 in a year would typically pay £34,000 in employment taxes. But by failing to comply with IR35, the person could structure their affairs to pay as little as £13,000.
A spokesman said: “Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances.
“However, it’s fair that two people doing the same job should pay the same taxes. These reforms will help ensure that happens.”
Mike Gibson, above right, is raising money to challenge a law that hits the self- employed