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UK Contractors Urged To Prepare For IR35 Changes

by Amanda Banks, Tax-News.com, London

19 August 2016


Public sector contractors could face a substantial tax hike if agencies are insufficiently prepared for the April 2017 reforms to IR35 legislation, online advisors ContractorCalculator have warned.

IR35 is the income tax legislation that may apply if someone is working for an organization through an intermediary, typically a Personal Service Company (PSC). If IR35 applies, all payments to an intermediary are treated as if they were the worker's employment income, and the intermediary must pay any tax and National Insurance contributions (NICs) due.

From April 2017, where workers are engaged through their own limited company (i.e. a PSC), responsibility to apply the IR35 rules will fall to the public sector body, agency, or other third party paying the worker's company. The public sector body, agency, or other third party will be liable to pay any associated income tax and NICs.

According to ContractorCalculator, the changes could mean that risk-averse and unprepared agencies avoid engaging limited company contractors directly, thereby avoiding the responsibility of evaluating a contractor's status and removing any resulting tax risk.

ContractorCalculator explained that the new rules involve debt transfer provisions being imposed on the party responsible for determining the contractor's IR35 status. An agency would therefore be at risk if they fail to deduct tax where they should. In turn, more workers could be forced by agencies into using Pay as You Earn (PAYE) umbrella companies, resulting in higher tax bills, it said.

Dave Chaplin, CEO of ContractorCalculator, said that HM Revenue and Customs (HMRC) is attempting to encourage agencies to be risk-averse when dealing with limited company contractors, in effect "penalizing a group of workers for a perfectly legitimate way of working simply because the supply chain is not prepared to accept its responsibility."

He commented: "Despite all the evidence to the contrary, HMRC still views incorporation as a solely tax motivated exercise and this latest attempt to restrict this as a means of engagement for contractors proves it. HMRC has maintained that the proposed reforms are only intended to be implemented in the public sector, but the widely held belief is that it could be rolled out in the private sector in time."

"This could have enormous implications for the limited company contracting model, costing contractors thousands of pounds in extra tax, and significantly reducing the flexible labor market as a whole. This will be hugely damaging for the economy which relies heavily on the skills and expertise of the UK's 1.9 million freelancers and contractors."

TAGS: tax | public sector | United Kingdom | tax authority | contractors | legislation | social security | individual income tax | Work | Regulations

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