The Government’s proposals to extend its “off payroll workers” rules to the private sector could do harm disproportionate to the extra tax collected

The most striking aspect of the Budget was the somewhat depressing news on the state of the economy, and the downgrading of growth predictions. It was actually rather light on major tax changes.

One proposal which will cause major waves is the planned consultation on “off-payroll” workers.

There are vast numbers of contractors operating in the UK, mostly through “one man band” limited companies but also via more contrived arrangement such as umbrella companies operated by specialist providers. They operate largely in the IT industry but also in a whole range of other consulting, technical and professional spheres.

Depending on who you listen to they are either providing essential services in a flexible and cost effective way, to the great benefit of the wider economy, or using a company as a cover for what is really an employment, thus denying the exchequer the substantial tax and national Insurance contributions they ought to be paying.

In theory this is covered by tax rules generally known as IR35 after the original Inland Revenue press release that announced their introduction in 1999. Under these provisions a contractor who would properly be regarded as an employee of his “customer” were it not for the use of his or her personal company is obliged to own up and account for PAYE.

Unsurprisingly, contractors tend to take a much more lenient view of the employment definitions than HMRC might wish, and only a tiny proportion regard themselves as being caught by the rules. They will with some justification point to the many benefits of employee status which, as contractors, they forego.

Since April 2017 HMRC have tried to counter what they see as an abuse in the public sector, by passing the responsibility for deciding whether a role should carry employment status on to the “mployer” – i.e. the hospital, government department, school etc. If the contractor is found to have employment status, the end user has to deduct tax and NIC from the payments it makes to the contractor’s company. Anecdotal evidence is that as a result of this, many contractors simply chose not to work in the public sector, causing important projects to be delayed or cancelled.

It is now proposed to roll out these arrangements to the private sector, which will have massive implications for both contractors and those businesses who hire them. It could potentially be very economically damaging. Contractors often work for relatively short periods for a particular client, and as a group represent a skilled and flexible workforce who, whilst they may enjoy some tax breaks, also give up important – and expensive – rights which could be a potential barrier to a projects viability if employment status was imposed on the relationship.

We will be responding to the consultation and we would encourage other interested parties to do so too.