Self-employed workers will see their tax bills increase from 2020 onwards as the government has expanded the off-payroll working rules, known as IR35, to the private sector.
The move was announced in today’s Budget (29 October), and will imply that contractors such as IT and management consultants who work through their own company but are in practice employed by a third party, pay the right tax as employees.
Chancellor of the Exchequer Philip Hammond said: "Last year we changed the way these rules are enforced in the public sector, but widespread non-compliance also exists in the private sector. Following our consultation, we will now apply the same changes to private sector organisations as well.
"After listening carefully to representations made during the consultation, we will delay these changes until April 2020, and we will only apply them to large and medium size businesses."
According to HM Treasury, the taxpayer could be missing out on up to £1.2bn a year by 2023 as a result of people getting the rules wrong, and incorrectly paying tax as if they were self-employed.
According to tax experts IR35 can reduce a worker’s net income by up to 25 per cent, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.
Last April, the government reformed off-payroll working in the public sector, successfully increasing compliance, it said. The change has meant £410m in additional revenue for the taxpayer.
In the Autumn Budget 2017, the government announced it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector, and a consultation was launched in May.
Trade body Association of Independent Professionals and the Self-Employed (IPSE) has said extending the off-payroll working rules "which have caused project delays and skills shortages in the public sector since being introduced in April 2017", would "stifle innovation, reduce productivity and heap a major administrative burden onto UK businesses".
Earlier this year, the government made a U-turn on a previously announced tax cut which would have saved 3.4 million self-employed workers up to £150 a year.
Chancellor Phillip Hammond decided to scrap the plan to end Class 2 national insurance contributions (NICs), which was announced in the 2016 Budget and planned to be introduced this year. This cut was tabled to cost HM Treasury about £360m a year from this year onwards.
The move would have saved millions of self-employed workers £150 a week in national insurance contributions but would have hit the lowest earners, who would have had to make up the shortfall with extra contributions to reach state pension entitlements.
According to Treasury analysis, about 300,000 people who make profits of less than £6,000 a year would have had to pay five times more in state pension contributions than they currently do if the cut was implemented.
Angela James, director at specialist brokerage CMME, said: "The extension of public sector IR35 reforms to the private sector is disappointing at best. As we move into an uncertain Brexit Britain, enterprise is more integral than ever to our economic growth.
"Although this is applied only to medium and large businesses at present, my concern is that increasing tax liabilities may spark a trend of the self-employed ditching their limited companies for umbrella ones, where all income will be PAYE. This disincentivises a fast-growing, entrepreneurial section of the economy."
maria.espadinha@ft.com
