HMRC set to take Chancellors lead & propose changes to IR35

The Chancellor announced some fairly significant changes to the benefits that contractors currently enjoy. These include the replacement of the existing dividend tax credit with a new tax-free allowance of £5,000, and the likely increase in dividend tax rates.

George Osborne has also suggested that IR35 will be re-examined to ensure that it is as effective as possible – this is likely to mean a tightening of the legislation.

Elizabeth Marshall, Associate at law firm Kemp Little said: “Taken together, these changes are likely to reduce the appeal that the acclaimed ‘contractor status’ currently holds, and could drive a number of individuals to consider whether they would in fact be better off overall as employees.”

This could have a “serious effect” on freelancers and potentially raise tax bills, accounting firm Moore Thompson added.

IR35 legislation was introduced in 2000 and aims to tackle ‘disguised employment’.

It means those working through an intermediary pay the same tax and National Insurance Contributions as any other employee, where they would have been providing the same services.

The document says a number of those paying tax under IR35 has remained fairly static.

But, the number of PSCs has increased “dramatically” from 200,000 in 2011-12 to 265,000 in 2012-13 and it is expected to continue to grow.

HMRC estimates that during 2015, the cost of non-compliance regarding IR35 will total £430m.

The document also responded to some calls for IR35 to be abolished outright, saying “the government does not believe this is an option”.

One idea for reform HMRC has put forward is that the employer in a PSC (or ‘engager’) should determine whether an employee falls under IR35. This can be complex, the document notes, and as such the test for determining whether someone is under IR35 would also be simplified. This proposal, if accepted, could mean extra red tape for businesses.

“While this still remains a proposal on paper, there are a number of indications which suggest that this could be the way that HMRC intends to monitor PSCs in future.

“This could create an additional regulatory burden for businesses and it is an issue that they will need to monitor,” Mark Hildred, managing partner at Moore Thompson concluded.

Image: tax Return by Shutterstock