IR35 Changes Review by Treasury

Yesterday the Treasury announced that it would review the unpopular reforms to tax rules for off-payroll workers, after the proposals rattled the contractor market and left freelancers facing massive pay cuts, higher taxes and the threat of being left out of a job.

As things stand IR35, which aims to prevent workers from disguising themselves as freelance contractors so they pay less tax, will be extended in April.

Under the changes private sector employers will be responsible for assessing whether contractors need to pay income tax and national insurance contributions.

The Treasury review will assess how to smooth the implementation of the new IR35 regime, due to come into effect in April, so genuine freelancers who are not supposed to be affected by the changes are not impacted. It is expected to be completed by mid-February.

The IR35 rule change shifts the responsibility for assessing the tax status of contractors from the worker to the employer, to stop people who are described as “self-employed” but who may in reality be more akin to employees playing the system. There are tax advantages for both self employed and employer, particularly regarding the payment of NICs.

The freelance workforce is substantial, numbering more than five million, generating an estimated £300bn a year and an important part of the UK’s economy.

The changes have previously been described as “job killers” and it looks as if that’s going to be true. Already many large companies, especially the biggest banks, have begun to refuse to work with contractors altogether for fear of getting the rules wrong and falling foul of HMRC.

Now genuine contractors are being pushed into arrangements where they are paid as if they were full-time employees, earning the same but paying more tax. It will have the effect of cutting their pay by as much as 40%. It will also make them far more expensive to employ. Many have already decided to return to full-time work on lower salaries, while others have been unable to find work altogether.

Jesse Norman, Financial Secretary to the Treasury, said the review was designed to see how some of the perverse side effects could be diminished. He said that the purpose of this consultation is to make sure that the implementation of these changes in April is as smooth as possible.

While the review was broadly welcomed, concerns were raised that this might be too little, too late.

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Although every effort has been made to ensure the accuracy of the information contained in this blog, nothing herein should be construed as giving advice and no responsibility will be taken for inaccuracies or errors.

Copyright © 2020 all rights reserved. You may copy or distribute this blog as long as this copyright notice and full information about contacting the author are attached. The author is Kate Russell of Russell HR Consulting Ltd.