New tax laws designed to crack down on individuals classifying themselves as self-employed are set to hit businesses supplying contract labour to the public sector.

Our Employment partner Guy Guinan, looks at the latest changes in the law.

Why was the IR35 legislation introduced?

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So what do the new changes mean and what are the implications?

Whilst the Chancellor has reversed his proposed National Insurance Contributions (NICs) increase for the self-employed, reform of IR35 legislation is full steam ahead. From April thousands of self-employed workers operating through their own limited company and providing services to the public sector will find themselves being paid subject to prior deductions for income tax and employee NICs rates as if they were employees.

Step 1
Ask yourself the following hypothetical question:

If the individual was contracted directly to the public sector end user of the services (rather than via their limited company), would that individual be deemed an employee of the end user? If the answer to the question is yes the public sector end user or intermediary paying the limited company will have to tax the fees paid to the limited company.

Step 2
Who is liable to account for taxes to HMRC?

The public sector end user and, if there is one, the intermediary business (typically a recruitment agency) which contracts with the limited company of the individual, must consider the question in step 1 and whoever is responsible for paying the fees to the limited company must tax those fees (excluding the VAT element if the limited company is VAT registered) through its own payroll as if the individual was its own employee.

Step 3
Impact on public sector?

It is already very clear that the shift in risk for tax liability has made public sector end users and intermediaries cautious when assessing IR35 status. Costs may be driven up if contractors insist on maintaining take home pay to undertake assignments, putting more strain on the public purse, and there has already been something of an exodus from public sector contract work by limited company contractors concerned about tax status. This gives rise to concerns as to the quality of contract labour available to the public sector.

Step 4
The bigger picture – confusion on employment status?

From April a different tax regime applies to public sector and private sector supply. This adds to the general misalignment of UK tax and employment laws. An individual can be deemed ‘employed’ for the purposes of income tax and NICs, yet self-employed with regard to employment rights. So, whilst subject to PAYE and employee NICs rates tax, a contractor will not necessarily enjoy any of the benefits of employment, such as paid holiday, sick pay, minimum notice and discrimination protections.

Step 5
What does the future hold?

Many commentators believe the IR35 changes will be extended to the private sector within a year or two. Recently reported cases such as Uber, Citysprint and Pimlico Plumbers have concluded that ostensibly “self-employed” people in fact have some employment rights as “workers”, in particular rights to holiday pay. A government review of employment status is underway focussed on the challenge of the gig economy, and whether the current legal framework is fit for purpose in today’s world. The IR35 changes, and Chancellor’s aborted NICs increases for the self-employed, demonstrates that this is an issue seemingly high on the Government's agenda. It may be that radical reform to the law around employment status and taxation is a realistic prospect in the next Parliament.


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Author: Guy Guinan
Title: Partner