Contractors in the private sector are facing changes to long-standing IR35 tax legislation, first introduced in April 2000, which will see the responsibility for determining the employment status of the contractors moved to the engager rather than the worker. This intermediaries legislation is currently applied to workers engaged to carry out public sector contracts, but the government is now proposing to apply it to the private sector as well. ICAEW has said that it believes that: 'While there should be just one system for all, the complex system is not yet ready to be launched onto the much larger private sector'.

IR35 was originally designed to combat the structuring of engagements to avoid the payment of PAYE. If IR35 is found to apply to a contractor, income tax and national insurance contributions (NICs) are deducted before payment as happens with PAYE employees. Where a contract is closer in function to employment than self-employment, workers are required to pay tax through a payroll operated by whoever pays them. This applies even if they are engaged through an intermediary, such as their own personal service company.

It can also create a significant disparity in terms of tax paid as IR35 contracts and PAYE contracts are treated differently. According to Andrew Brookes, head of employer solutions at Menzies LLP: ‘For a typical contract of £100,000 cost to the end client, with annual travel and accommodation costs of £10,000, there is a difference in taxes and NICs of £13,400 between the contract outside of IR35 and the one subject to PAYE. This problem is compounded by the fact that for the PAYE contract, the expenses are not deductible, and therefore come out of the employee’s net income.’

When introduced, IR35 caused significant issues for public sector contractors in determining employment status because the case laws used as precedence rarely aligned with the the real-world situations it was applied to. To remedy this, HMRC created the online check employment status for tax (CEST) tool. However, the tool is frequently criticised for failing to include mutuality of obligation (MOO) in its calculation and has caused HMRC to lose a number of legal appeals by incorrectly-categorised workers.

Sarah Ghaffari, ICAEW technical tax manager, said: ‘The recent proposed changes to the taxation of off-payroll workers is a good opportunity to ensure that individuals performing the same work are taxed in the same way, regardless of how they operate. There is a disparity between total tax paid by, and on behalf of, both the self-employed and employees which needs to be considered.

‘However, the changes to the public sector in 2017 have been beset by problems and these need addressing before any change is made to the private sector. UK businesses are already having to implement software and process changes for Making Tax Digital and the full extent of the impact of Brexit is still unknown. Any change to the private sector should not be introduced until April 2020 at the earliest.

‘There is a big opportunity here for HMRC but there are three key policy issues that need to be addressed. First, the tax and legal status of workers should be the same. The rules are complex and not easily understood so having differences is confusing. This will make it easier for employers and employees to be certain of the contract and work they are undertaking.

Second, the tax and benefit differentials between different types of work need to be addressed. Finally, off-payroll working in the private and public sectors should be taxed in the same way, giving all workers the same benefits.

‘When considering these changes, a holistic approach needs to be taken. Any solution for tax and national insurance should align with solutions for employment status. The current system is not sustainable with today’s modern working practices.’

Report by James Bunney