Extra money for Brexit and the NHS, changes to growth and debt forecasts, changes to tax thresholds and a new ‘digital services tax’. These have been the points which have received the most media attention from the autumn Budget. Another important announcement, however, has predominantly slipped under the media radar and failed to become a major ‘talking point’ from the new budget.
Hammond announced an IR35 tax clampdown that will have a huge affect on contractors and freelancers who operate in the private sector. Rules which already apply to the public sector will be extended to the private sector in 2020, with the exception of small businesses.
The reforms mean that self employed people could end up paying more tax.
Private sector companies with over 250 employees will now have an obligation to check whether they are using any contractors who should be paying tax. The aim of these changes is to clamp down on self employed workers who should really be treated as employees, but work through a third party.
In reality, these changes don’t mean that IR35 is being applied to the private sector for the first time. Rather, it just means that the burden of responsibility to pay the right amount of tax shifts from the subcontractor to the company.
In the private sector, relationships with freelancers are generally more complex than in the public sector where the rules already apply. There are fears that the changes will have a negative impact on genuinely independent contractors.
The new IR35 rules could reduce a subcontractor’s annual income by as much as 25% when extra income and National Insurance contributions are taken into account.
What’s more, some subcontractors are worried that the changes will deter p sector firms from employing them. They think that the risk of facing a large tax bill at a later date will prevent firms employing freelancers, even if it is just for genuine sub-contractual work. The fact remains that employers could face serious consequences if they misidentify a worker as an employee or self employed.
The Treasury estimates that the change in rules will earn the taxpayer an extra £1.2 billion by 2023. An extra £410 million has already been raised since rules were introduced in the public sector in April 2017. This is a similar figure to the amount that the new ‘digital services tax’ is expected to raise.