Up to 100,000 professionals could face a hefty tax rise after it was revealed that ministers are discussing tightening rules around personal service companies before the Chancellor’s Autumn Statement on 25 November.
According to several media outlets, including The Guardian and the Daily Mail, ministers are discussing a change to regulations around personal service companies (PSC), with the move potentially forcing 90% of those employed ‘off the books’ to go back on the payroll and generating up to £400m a year for the exchequer.
Under current rules individuals using PSCs can make savings on income tax and national insurance and write off basic expenses against tax, while employers benefit from smaller NI and pension bills.
Following a public backlash against the schemes after it was revealed that BBC employees, among others, had reduced their tax bills by arranging to be paid through PSCs, the government has been examining ways of strengthening the rules surrounding them. It is not the first time such rules have come under scrutiny: In 1999 Gordon Brown also clamped down on “disguised employees” through the IR35 scheme.
Reports suggest that anyone using a PSC who works for an organisation for more than one month will be considered an employee and would be obliged to move on to the payroll.
The responsibility for policing the rules would fall on businesses rather than the individual, while agencies would be responsible if they provide consultants to businesses.
HMRC is also allegedly drawing up an online checklist that will allow employers to gauge if a contractor should be reclassified as an employee, although they did not wish to make any comment when asked by AccountingWEB.
Anyone not paid through a PSC would therefore be paid by PAYE and would also make employee NICs, while the company would pay employer NICs. The new rules would apply to both private firms and the public sector.
Ministers have apparently yet to make a final decision on whether to introduce the change. They will want to see how businesses respond to the proposal at the annual CBI conference.
A ‘government source’ told The Guardian: “This is about fairness in the tax system. It is just not fair to have people in the same company doing the same jobs paying different levels of tax.”
Operating a freelance business ‘almost impossible’
Several freelance contracting organisations have accused the government of ‘kite-flying’ – briefing the media to test the reaction to a proposal – causing freelancers and other affected parties unnecessary stress.
Commenting on the proposals Chris Bryce, chief executive of the Independent Professionals and Self-Employed (IPSE), said: “IPSE is seeking urgent clarification on whether reports of a 'one month' limit, after which individuals will be 'obliged to move onto the payroll' are under serious consideration.
“This would make operating a freelance business almost impossible in many instances, and would cause untold damage to the flexible economy. If the government are giving this idea any consideration, they should think again.”
“This measure was not contained within the government’s original consultation documents and has not been raised by the government with stakeholders in its regular IR35 Forum meetings.
“Our members see themselves as small businesses and the government must recognise that if freelance contractors are taxed as employees, then many will expect employment rights in return.”
Reaction to the proposals
Reacting to the news on an Any Answers thread, AccountingWEB members gave the proposals a mixed reaction. Tim Vane welcomed the changes, stating: “Good. Clarity at last, get rid of the doubt”.
“Seems unlikely to be 1 month”, user Ireallyshouldknowthisbut said, “12 months is my best guess. Clear rules are needed, the hard bit in this area is actually getting the wording right so it doesn't sweep in the 'wrong' type of business.
Speaking to AccountingWEB Emily Coltman, chief accountant at FreeAgent said she would be “concerned” to see such proposals enacted, as they would penalise thousands of genuine contractors. “The period of one month before an engagement becomes employment is far too short”, said Coltman. “It is my belief that a year would be much more realistic and fair.”
“I also do not agree with the government's stance that there should be a ‘level playing field’ between contractors and employees, since contractors bear a much higher business risk; they must find contracts, keep their own books, chase late payments, find suppliers, manage their own taxes and much more.
“If the government believes in small business and in the flexibility of the workforce, it should encourage, not penalise, contracting.”