In IR35

The new IR35 rules we reported on last week will have the effect of redesignating virtually all contracting professionals via their own limited companies as subject to the regulations, employment tax experts have declared.

The new rules, which were announced in last month’s Budget, are expressly aimed at clamping down on the use of limited companies (also known as personal service companies, or PSCs), not only in the public sector but eventually in the private sector as well, experts forecast.

Addressing a seminar organised by the Freelancer and Contractor Services Association (FCSA) last week, the Executive Director of professional services company EY, John Chaplin, predicted that most public sector organisations will switch to a model presuming that PSC contractors are subject to IR35 “unless they can really, really prove otherwise.”

The seminar was also attended by Government officials, who provided more information on the Government’s renewed crackdown on the use of PSCs in the public sector.

The proposals have drawn fierce criticism from the Association of Professional Staffing Companies (APSCo) due to the increased burden they will place on recruitment organisations engaging contracting professionals to determine whether such a worker is inside or outside IR35.

Public sector organisations engaging contracting workers directly will be obliged to put them on their own payrolls as well as account for and deduct income tax and National Insurance.

Mr Chaplin has predicted that, should the new rules be implemented in the public sector, it would only be a matter of time before they would be replicated in the private sector – a view shared by Stuart Farrow-Smith, head of business taxes at Capita.

HMRC’s senior policy lead Julie de Brito, however, told the seminar that there were no Government plans for this extension.

Should the rules ever extend to the private sector, Mr Farrow-Smith argued that the effects would be the same as those described by Chaplin for the public sector. He said: “As a large corporate it is all about risk, and the assumption is that you are going to fail (IR35) unless you can absolutely prove you are not (inside IR35).”

He proceeded to forecast that the task of determining individual contractors’ cases would be removed from businesses, which would otherwise face huge risks of tax and NIC liabilities. A more centralised approach would be adopted instead, Mr Farrow-Smith added.

HMRC has long argued that PSCs can be misused to provide disguised employment, specifically meaning contracting workers who hold permanent positions without paying the same NICs and income tax of a permanent employee.

The alternative for professionals wishing to work on a contracting basis, of course, is the PAYE Umbrella Company model, which is exempt from IR35.

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