Self-em­ployed still ‘over-taxed’

The Daily Telegraph - Your Money - - YOUR MONEY -

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

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