UK Government crackdown could bring bad news for freelance workers
SELF-EMPLOYMENT is booming in Scotland. Newly published statistics show that 322,900 Scots worked for themselves last year, one of the highest numbers ever recorded.
But there may be problems ahead. The UK Government is cracking down on bogus selfemployment and the use of independent companies for tax avoidance, with tough rules already introduced for contractors in the public sector.
Now the Government wants to extend the regime to the private sector, announcing a consultation earlier this month. But organisations warn it will financially harm genuine freelancers and prove impossible to enforce.
Freelancers currently pay lower national insurance than full-time employees and can use a so-called personal service company (PSC) to reduce taxes even further.
Companies have taken advantage of the lower national insurance rates by treating contractors as self-employed, which reduces their own national insurance liabilities.
Rules introduced in 2000, known as IR35, were meant to ensure that contractors pay broadly the same tax as full-time employees, but 90 per cent of firms flout the law, according to the Treasury.
Last April, the Government began its clampdown by shifting liability on to public sector organisations to determine their contractors’ status and deduct the appropriate taxes.
Thousands of temporary workers were hit with higher tax bills, forcing them to raise prices or quit sectors like the NHS.
HMRC also embarked on a number of highprofile tax investigations into BBC presenters, some of whom been ordered to pay back six -figure sums after receiving their pay as freelancers through PSCS.
A High Court judge is currently deliberating over an appeal made by three BBC News presenters over a combined tax bill worth £300,000, with allegations made in court that the BBC forced presenters to set up PSCS or face a pay cut.
The BBC has denied coercing workers into using PSCS and insists it complied with the law. But the case highlights HMRC’S determination to crack down on off-payroll working.
Chris Bryce, chief executive of the Association for Independent Professionals and the Selfemployed (IPSE) said the move would be a “fatal blow to the UK’S flexible economy”.
“For the Government to even consider introducing the ill-judged changes to IR35 in the public sector to the private sector before their full impact can be truly analysed is outrageous,” he said. “It is shameful that the Government did not publish the external research into the impacts of the public sector changes prior to announcing this consultation.”
IPSE’S own research suggests thousands of contractors left the public sector after the changes were introduced last April, with the NHS particularly affected. This painted a “very different picture” from the Government’s own reports, Mr Bryce said.
“The Government is kidding itself if it thinks HMRC’S online tool – which it encourages people to use to determine their IR35 status – can be relied upon,” he said. “IR35 is so complex, not even HMRC can accurately determine who it applies to. Now they want to shove that impossible task on to UK businesses.”
Earlier this month, an IT contractor won a tribunal appeal against an HMRC bill of £26,000 brought under the new IR35 rules. Ian Wells provided business services through a PSC to the Department for Work and Pensions for a year.
The advisers who represented Mr Wells in court said the case showed HMRC “can’t accurately assess a contractor’s status”. Seb Maley from Qdos Contractor said: “The Government is serious about clamping down on what they believe to be non-compliance, but worryingly, can’t recognise whether a contractor belongs inside or outside IR35. Clearly, this is no time to extend public sector changes to the private sector.”
Mike Cherry from the Federation of Small Businesses said: “The fear of making an honest mistake could stop employers taking on the genuinely self-employed, even when it’s clearly the right thing to do.”
Mel Stride, Treasury financial secretary, said: “It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy. B
“ut it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services.”
The Treasury insists the rules will not affect the “genuinely self-employed” and only one-third of those using personal service companies should be treated as employees.
The consultation closes on August 10.