Worrying Times for Contractors

Personal service company IR35
Posted 2018 by Chris Davies

These are worrying times for anyone providing their services through a Personal service Company (PSC) and potentially affected by IR35.

Deciding whether a contract falls within or outside of IR35 can be very difficult as there is no statutory definition of employment/self-employment and one must look at past cases for clues to determine whether a contract is within or outside of IR35.

Despite many decisions by the tribunals and Courts both for and against HMRC over the last 18 years the position is still very grey and most contractors seem to have taken the view that their engagements fall outside of IR35.

This is obviously not the approach that HMRC would favour and they have recently attempted to close the perceived tax gap (in their eyes) where contracts are made between PSCs and the Public Sector.  The decision as to whether a contract falls in or outside or IR35 now rests with  the Public Sector body. Since whoever pays the PSC is liable for any tax not properly deducted under IR35, anecdotal evidence suggests that some Public Sector bodies, rather than face a potential tax charge and penalties, have taken a blanket approach and have decided that all contracts fall within IR35 leading to a substantial increase in tax liabilities of the PSC and its employees, against which there is no right of appeal.

HMRC regard the new rules as a success and a recent HMRC Consultation was issued in May with a closing deadline of 10th August to set out proposals for how best to tackle the taxation of PSC’s operating in the Private Sector. Whilst a number of option are considered the majority of the Consultation document focuses on replicating the Public Sector model into the Private Sector.

This could have a massive impact on the current labour market. Contractors would be forced into paying the same amount of tax an NIC as an employee but with no security of tenure, no redundancy rights and without many of the other benefits available to employees. In that case why would an individual remain contracting when employment offers better terms? The flexibility currently offered to large businesses using contractors for ad-hoc projects could be wiped out overnight.

This could lead to a huge change in the way that small businesses currently operate and depending on the outcome of the Consultation and how soon HMRC could force this through, it could be in place by as soon as April 2019. We will keep you up to date with developments as they happen.