A change in the rules on self-employed contractors?
HM Revenue & Customs (HMRC) have two proposals on hold which could affect up to 1.5 million self employed freelance contractors and consultants and the people who provide their work.
HMRC often view freelance self employed work as “disguised employment” allowing the worker to pay less tax and national insurance contributions than they would if they were an employee. In addition, one man band personal service companies (PSCs) often give shares in their business to family members. This allows them to spread business income to family shareholders, bypass the PAYE system, and further reduce tax payments by taking payment as dividends instead of paying salaries.
A recent Freedom of Information Act request shows that in the 10 years since ‘IR35’ rules were introduced to counter disguised employment by PSCs an average of £1.5m per year has actually been raised in taxes. This falls a long way short of the £220m per year which was forecast at the time. So it is not surprising that HMRC want to clamp down on such activity. The two measures on hold are ‘false self employment’ rules which apply to the construction industry and ‘income shifting’ rules for everyone else.
Employed or self employed?
There is no simple test of either status to help clients who offer work to self employed freelance contractors. HMRC always assess the client, NOT the self employed freelance contractor, for tax and national insurance in self employed status disputes.
Many clients simply insist on paying ‘Fred Ltd’, instead of ‘Fred’, to avoid any risk of tax and national insurance under the PAYE system. This shifts the problem to ‘Fred Ltd’ who must decide if ‘Fred’ is self employed under ‘IR35’ rules by asking “if it wasn’t for ‘Fred Ltd’ would ‘Fred’ be an employee of the client?” Each case is open to interpretation and HMRC may hold a different opinion with regard to status. If HMRC find a business has fallen foul of the rules they will not only be liable for the unpaid tax and national insurance but interest and penalties on top. ‘’If you are self employed make sure your contract covers the big 3 tests of self employment’
What should I do?
If you provide work for self employed freelance contractors you may wish to follow the lead of most major companies and insist on paying ‘Fred Ltd’ rather than ‘Fred’ or at least ensure the contract of service includes an enforceable indemnity which requires the self employed freelance contractor to make good any loss from any HMRC investigation.
If you are self employed make sure your contract covers the ‘big 3’ tests of self employment (as well as having your own public liability and other insurance) which can be summarised as follows:-
• No personal service – i.e. the right to send and pay a substitute
• No control – i.e. the right to decide where/when and especially how to do
• No mutual obligations – i.e. the right to refuse work offered to you
We will have to wait to see what our new coalition government does with the HMRC proposals on false self employment and income shifting, but in the meantime if you need advice on any issue raised in this article then please do get in touch with Stephen Adams on 01772 821021.
Stop Press – ‘IR35’ rules to be reviewed
The Coalition ‘programme for government’ confirms “we will review ‘IR35’ as part of a wholesale review of all small business taxation, and look to replace it with simpler measures that prevent tax avoidance”.