Will HMRC force businesses to determine the IR35 status of their contractors?

Ann Bibby is a Chartered Tax Advisor in Worcester specialising in Business and Personal Tax issues.

HMRC have issued a consultation document to reform IR35 legislation, with their main objective being to protect the exchequer and level the playing field between direct employees and those operating through their own company.

Before the introduction of IR35 in 2000, people working through their own limited company could pay significantly less tax and national insurance than either an employee or self-employed individual.

IR35 was introduced to ensure that people working through their own company, often known as a “personal service company”,  but who worked in a similar way to a traditional employee were taxed at the same rate as that traditional employee.

However, HMRC suspect that not all companies that should be complying with the IR35 rules are doing so. This is based on the fact the number of personal service companies has increased significantly, but the amount of revenue generated from the IR35 tax has remained fairly static.

The government estimates that in this current tax year alone the exchequer will lose around £430 million owing to non-compliance with the current IR35 legislation. They believe that if this problem is not addressed, this figure will continue to rise significantly.

Possible Reform

The current option being considered is to shift the burden of responsibility from the contractor to the client that engages that contractor, taking the burden of proof away from the “worker”.

The government have stated in the consultation document “they recognise that this would increase the burden on engagers and welcome views on this option”.

Our initial thoughts are that the proposed changes could have detrimental effects on the working environment in the UK, with the burden being passed to “end users” to interpret the complex IR35 rules and decide the employment status of the contractors they engage. End users may decide to stop using the contractors, to avoid the complications and potential implications for non-compliance.

A move away from personal service companies will also leave people with business and tax structures that will be costly to unravel.

A number of organisations are making representations to HMRC about the issue. More details of the planned changes will emerge once the consultation period ends on 30th September 2015.

For more information please contact Ann Bibby in our Worcester office (01905 744898) or abibby@hcrlaw.com.

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Ann Bibby
Chartered Tax Adviser
Direct Dial: +44 (0)1905 744898
Mobile: +44 (0)7872 871289
Email: ABibby@hcrlaw.com