London, United Kingdom (PressExposure) November 17, 2015 -- Two national newspapers Daily Mail and The Guardian have reported that government is toughening rules for contractors who work through personal service companies. The new measures have been fuelled by public figures such as Jeremey Paxman and Fiona Bruce using personal service companies to avoid tax.
It is believed that ministers are considering a proposal that will bound the employers to treat a contractor as an employee if a contractor works with the employer for more than a month. The proposal will shift the responsibility to the employer.
For instance if an IT Contractor is working with an employer for two months, he will be considered as an employee and the employer must process his PAYE and take out national insurance and PAYE before paying him or her.
HMRC is also planning to introduce an online checklist that will make it much easier and simpler for employers to assess if a contractor should be treated as an employee or not?
Currently, 100,000 contractors are working through personal service companies which the government believes are costing the exchequer £400 million a year in lost taxes. According to HMRC, many people like IT Contractors, nurses, locum doctors and other agency workers are using personal service companies to avoid National Insurance and PAYE. 90% of the contractors who work through limited companies are thought to be not genuine contractors and should be treated as normal employees which means they should pay income tax and national insurance instead of corporation tax and claiming expenses.
The new 'One Month' rule will practically make it impossible for contractors to work through limited companies and will earn Government £400m extra in taxes. However, no final decision is made, and ministers are looking at the reaction of the business community in the next CBI conference. It could be announced in the Chancellor's Autumn Statement on 25th November.
The announcement and publication in two national newspapers are in conformity with HMRC's past practice of kite-flying, where they test the reaction by taxpayers and professional bodies before any official announcement.
The government believes that it will bring fairness by treating all the employees working in the same company equally.
However, the tax office has yet again failed to recognise the fact that working through a limited company does come with lots of disadvantages. Contractors are not entitled to any benefits; there is no job security, no sick pay, no redundancy pay, no holiday pay and no pension. Contractors have to support themselves out of their savings during downtime while moving from one contract to the other. The additional slice of income due to contracting is a reward for the risk being taken as a contractor.
The proposed rule may not effect Fiona Bruce, who is currently living in a Â£14 Million house, but it does affect ordinary contractors like locum doctors, nurses, IT consultants and many others. It sounds like cracking the nut with a hammer. The government has already abolished tax credit on dividends and seriously considering abolishing Travel and Subsistence Relief. On top of that 'One Month' rule will simply abolish Personal Service Companies and contracting. The government would be much better off by going after those involved in tax evasion.
The industry body IPSE have very strong reservations about the chancellor's proposed measures.
Reacting to the reports, IPSE Chief Executive Chris Bryce said:
"IPSE are 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. Springing such a measure on a sector which is already short on confidence could cause significant harm to the economy, which relies on independent professionals for flexibility and innovation.
"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. We are very concerned these measures will damage the UK's flexible labour market, making it less tenable for independent professionals to lend their expertise to businesses requiring their services."