Possible Changes to Taxation of Contractors

It has been reported (though with no official confirmation) that the Treasury is considering reviewing the taxation of contractors.

The Financial Secretary to the Treasury is reported to have said that “an issue of fairness was at stake” in deciding whether the private sector should be subject to the same rules as the public sector in relation to freelance workers using personal service companies.

If similar rules as those which apply to the public sector were introduced for the private sector, then the employer would be responsible for the tax if it were determined – based on the facts – that the individual supplying the services should be taxed as an employee.

There is, it seems, an expectation that any changes would not be introduced overnight though and a more likely route (if any action is to be taken) might be the launching of a consultation with changes coming later.

The ‘off-pay roll working rules’ for those providing their services via an intermediary are in place, broadly speaking, to ensure that the same tax and NIC is paid as if they were employees.

But the rules aren’t automatically applied. The decision as to whether the new ‘off-pay roll’ rules apply or not is up the local authority. It is their responsibility not that of the intermediary company to decide whether the rules apply. That is the big change.

HMRC have provided an on-line tool to check employment status as a pre –requisite. This can be used in relation to individuals providing their services as sole traders, partners or through limited companies.

This will lead to a conclusion based on the facts. Broadly, if the nature of the relationship between the provider of the service (the individual) and the user of the service (the Public Authority) would have been, ‘employer/employee’ without the personal service company (ie. under the IR35 test) then the Local Authority will need to start to deduct tax and NIC based on the ‘deemed employment income’.

Extending this approach to the private sector will, in effect, turn the responsibility for deciding status on the user of the service.

In closing, it is important to note that there is no official confirmation that this approach is to be adopted. So far we have a reported expression of ‘concern’ from the financial secretary to the Treasury.

As stated above, one would expect any change to be preceded by consultation.