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Budget 2018: Contractors – Tax consequences and employment status

Chancellor Philip Hammond welcomely said that “austerity is coming to an end” in the October 2018 budget however self-employed persons may not welcome the proposed tax changes under the IR35 rules.

The IR35 rules are designed to target those who are disguising themselves as self-employed when they are more likely employed.  The contractors who could be most affected by the change to the IR35 rules are consultants, IT contractors and engineers.

The Government is aiming to ensure that contractors who work through their own business/company, but are in reality employed by a third party, pay the correct taxes.

The Treasury estimates that around one third of those claiming to be self-employed are in fact employees in order to pay lower levels of tax and national insurance (NI) contributions.

In an attempt to prevent self-employed persons from paying less tax and NI contributions, in April 2017, the Government required the public sector organisations to decide whether contractors are self-employed or if they are their employees. Based upon their decision, the public sector now has to make the relevant tax deductions to their contractors’ earnings. The public sector has aired caution when making the decision whether the workers are employees or self-employed due to potential tax consequences.

From April 2020, the private sector will also have to decide whether their contractors are employees or self-employed for tax reasons. Medium and large businesses (generally those with 250 or more employees) will have to bear the responsibility to decide which contractors need to pay more tax and NI.

The Government have stated that the IR35 rules will not affect those who are ‘genuinely’ self-employed but medium and large businesses are undoubtedly going to be affected.

Factors to consider for medium and large businesses and contractors

These new rules may disincentivise affected private sector firms from trading with small firms if they perceive a risk of a big tax bill later on. The burden of deciding whether the contractor is actually self-employed or an employee could be another potential problem.

As much as the Government will say that it will not affect those who are ‘genuinely’ self-employed, the new IR35 rules will directly or indirectly affect all contractors and therefore all contractors must be aware of the new changes within the private sector.

As medium and large private sector businesses will soon have to decide whether contractors are employees or self-employed, this inevitably raises the question whether the contractors are entitled to employment rights as employees or not. Medium and large businesses will therefore have to carefully structure their recruitment and business strategies in preparation for the changes.

The new IR35 rules will need to be accounted for in both the business’ and the contractor’s terms and conditions of business and commercial contracts.

A positive for both the private sector and contractors is that the revised IR35 rules will only apply to them in April 2020 so the changes are not going to be made overnight and this allows time to prepare.

We can help!

If you require legal advice in respect of amending terms and conditions of business and/or commercial contracts or reviewing/auditing your company regarding your workforce’s employment rights in light of the new IR35 rules then please contact us to discuss how we can help.